BACKGROUND: The main aim of this exercise is to learn regression techniques by applying them to the estimation of equation (1) in the presence of (possible) anomalies in the stock market. Each group is free to choose weekly data for a company that is part of the S&P500 for the period January 2000 – September 2014.
Question: Carry on with the model in equation (1) for the conditional mean return, but in addition, model the dynamics of the returns’ conditional variance. To this end, after testing for volatility clustering in returns, select the GARCH specification that best characterizes the volatility of your company. Do so even if you do not find evidence of volatility clustering. You should show the steps for choosing the best GARCH specification. All statistics deployed should be mentioned and commented on. The final model should then be discussed.
Does your essay require any of the following additional parts?