(a) What is a news impact curve? Using a spreadsheet or otherwise, construct the news impact curve for the following estimated EGARCH and GARCH models, setting the lagged conditional variance to the value of the unconditional variance (estimated from the sample data rather than the mode parameter estimates), which is 0.096 GARCH EGARCH

μ −0.0130 −0.0278

(0.0669) (0.0855)

α0 0.0019 0.0823

(0.0017) (0.5728)

α1 0.1022** −0.0214

(0.0333) (0.0332)

α2 0.9050** 0.9639**
(0.0175) (0.0136)
α3 − 0.2326**
(0.0795)

(b) In fact, the models in part

(a) were estimated using daily foreign exchange returns. How can financial theory explain the patterns observed in the news impact curves?