2. Include a leverage effect in the variance equation. Estimate 2t C1 D !C .Rt ????t/ 2...
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2. Include a leverage effect in the variance equation. Estimate
2t C1 D !C .Rt ????t/
2 C2t
; with Rt D tzt; and zt N.0;1/
Set starting values to D 0:07; D 0:85; ! D 0:000005; and D 0:5. What is the sign of the leverage parameter? Explain how the leverage effect is captured in this model. Plot the autocorrelations for lag 1 through 100 for R2t as well as R2t =2t , and compare the two. Compare your results with Figure 4.5. Use an LR test to assess the significance of the leverage effect parameter .
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