2. Include a leverage effect in the variance equation. Estimate 2 t+1 = + (Rt...

2. Include a leverage effect in the variance equation. Estimate

σ2 t+1

= ω + α (Rt − θσt )2 + βσ2 t , with Rt = σt zt , and zt ∼ N(0, 1)

Set starting values to α = 0.1, β = 0.85, ω = 0.000005, and θ = 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 R2 t as well as R2 t /σ 2 t , and compare the two. Compare your results with Figure 2.4.