Answered: You believe th

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter9: Forecasting Exchange Rates

Section: Chapter Questions

Problem 5BIC

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You believe that the VIX trades in regimes where its average level is significantly different. You define four regimes from 2004 through 2021 June 2008 through October 2011 (financial crisis): February 2020 through March 2021 (the COVID-19 crisin); the 12-month transition periods before and after the financial crisis and the current transition period after the COVID-19 crisis and the remaining periods of low volatility. In order to test your hypothesis, you examine month-end values of the VIX from January 2004 through October 2021 (214 observations) and conduct the following regression: Dependent variable Y Month-end value of VIX Dummy variable X1 Financial Crisis 1 if between June 2008 through Oct 2011,0 if not Dummy variable X2.COVID-19 crisis: 1 if between Feb 2020 through March 2021, Dummy variable X2 Transition period 1 if in 12 months before or after the financial crisis orthe current period since the COVID-19 crisis (June 2007 May 2008, Nov 2011-Oct 2012 or April 2021-Oct 2021) 0 if not The results for the regression are as follows Coefficie nts 14.63 13.71 15.71 5.40 Standard Intercept financial crisis COVID-19 crisis transition a. How would the introduction of Dummy variable X4: Low volatility period (Jan 2004-May 2007, or Nov 2012-Jan 2020) affect the output of this regression? Why? Which of the coefficients are significant at the 0,01 level According to the regression result, what was the average value of the VIX C during the COVID-19 Crisis?

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