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Estimate the ARCH(1) and ARCH(2) models using the code in file SAS code.

Please help,

Consider the market closing daily prices on IBM in file IBMclose.dat.

Estimate the ARCH(1) and ARCH(2) models using the code in file SAS code.

Are the squared returns on IBM serially correlated?

Is therefore IBM volatility predictable?

Does your finding contradict the former conclusion that returns on IBM are white noise?


IBMclose.dat

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SAS code

options linesize=78;

* read in the data *;

data ibm;
infile 'IBMclose.dat';
input price;
return = dif(log(price));
t=_n_;

* squared returns lag 1 and lag 2 *;

retsq= return**2;
retsql1 = lag (retsq);
retsql2 = lag2(retsq);


* estimate the ARCH(1) model *;

proc reg;

model retsq = retsql1;

run; 

* estimate the ARCH(2) model *;

proc reg;

model retsq = retsql1 retsql2;

run;

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