Arch-Garch PPIFGS

Producer Price Index Finished Goods 1982=100

Transform to the monthly inflation rate

Noisy episodic inflation rate

Kurtotic monthly inflation rate

How to Model? Try arma(1,1)

Stationary monthly inflation rate?

Correlogram of residuals

Correlogram of residuals squared

Residuals squared trace

Modeling the variance

Is model satisfactory?

Corrrelogram of square of standardized residuals

Ordinary residual: e(t) Equation Window: Procs, make residual

e(t) =wn(t)*h(t) 1/2 ordinary residual = standardized residual*conditional standard deviation

Residuals: ordinary & Standard

h(t) 1/2 : conditional standard deviation

Equation window: Procs Make Garch Variance Series

e(t) =wn(t)*h(t) 1/2

Residstd & stdresid

Estimated Conditional Variance h(t) = α 0 + α 1 [e(t-1)] 2 + β 1 h(t-1) h(t) = 1.56X [e(t-1)] h(t-1)