Using the ADL(1,1)regression Yt = β0 + β1Yt-1 + Xt-1 + ut,the ARCH model for the regression error assumes that ut is normally distributed with mean zero and variance ,where
A) = α0 + α1 + α2 + ...+ αp .
B) = + ...+ + φ1 + ...+ φq .
C) = φ1 + ...+ φq .
D) = α0 + α1 + ...+ αp + φ1 + ...+ φq .

Question

Using the ADL(1,1)regression Yt = β0 + β1Yt-1 +  Xt-1 + ut,the ARCH model for the regression error assumes that ut is normally distributed with mean zero and variance  ,where
A) = α0 + α1 + α2 + ...+ αp . 
B) = + ...+ + φ1 + ...+ φq . 
C) = φ1 + ...+ φq . 
D) = α0 + α1 + ...+ αp + φ1 + ...+ φq .

Quizplus · Accepted Answer

The correct formula for the variance of ut in the ARCH model is given in choice A, where ut is normally distributed with mean zero and variance that is a linear combination of its past squared errors. Choices B, C, and D are incorrect as they do not provide the correct formula for the variance of ut in the ARCH model.