Hi all,
Im very desperate at the moment. The situation is im given these equations below:
Firstly, assume a discrete model for daily price differences as:
is iid N(0,1)
Secondly, the GARCH equation is given as:
Constraints:
and
Use the LIE and the assumption of the variance process is stattionary derive the marginal expected variance:
The second one is a GARCH(1,1) model. Im not too sure if you are familiar with it. Anyways, I dont have a clue on earth on how to use to the Law if Iterated Expectation and use it one the second equation (ie, i think you use it on the GARCH one).
It doesn't matter if you know what a GARCH model is, the problem is basically using LIE to solve the second equation and its just a trivial question.
Can someone work it out for me!? Its driving me nuts!
Thanks!
Edit: Consider or as the variance at time "t" or something