Question
Assume that a risk manager uses maximum likelihood method to estimate the parameters of a GARCH(1,1) model. The risk manager initially chooses a random value
Assume that a risk manager uses maximum likelihood method to estimate the parameters of a GARCH(1,1) model. The risk manager initially chooses a random value for the parameter , 0.89. This value increases to 0.91 after using Excel Solver tool, which gives the values for the parameters that maximize the likelihood of the data occurring. What is the impact of an increase of the parameter (from 0.89 to 0.91) on (1) the weight given to previous variance estimate, (2) weight to the long-run average variance rate, and (3) the level of the long-run average variance rate, respectively, while keeping the others fixed?
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