Suppose That a Researcher Estimates a GARCH(1,1) Model and Obtains

question 12

Multiple Choice

Suppose that a researcher estimates a GARCH(1,1) model and obtains a log likelihood function (LLF) value of 71.22. He is interested in testing whether an ARCH(1) model is a better model at describing volatility. If he estimates a model which imposes the necessary restrictions and obtains an LLF value of 68.21, what would be the conclusion of his likelihood ratio test (assuming a 5% significance level) ?

• A) Statistical evidence suggesting that ARCH(1) is better than GARCH(1,1)
• B) Statistical evidence suggesting that ARCH(1) is not better than GARCH(1,1)
• C) Statistical evidence suggesting that GARCH(1,1) is better than ARCH(1)
• D) We cannot say because we would need to know the number of observations

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Definitions:

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