Postby **Hvtcapollo** » Wed Jun 17, 2009 8:13 pm

you can use "z c" for the mean equation, I think. However, since the z is standardized residual then the c must be very close to 0. Anyway, you just estimate to see the possible initial value for T(1) and T(2).

The equation for the conditional variance should be

q11_{t}= 1-T(1)-T(2) + T(1)*(z1_{t-1})^2 + T(2) *q11_{t-1}

q22_{t}= 1-T(1)-T(2) + T(1)*(z2_{t-1})^2 + T(2) *q22_{t-1}

I guess you can use either estimated result from GARCH as the initial value for T(1) and T(2). But, you should try to estimate for both cases to see the output. The estimated result for T(1) and T(2) should satisfy the conditions that: They are significant and (T(1)+T(2))<1 ( to ensure the process is mean reverting). As long as the conditions are satisfied, the result is pretty and you can stop for the estimation and start writing your report. That's what I think, I did this project 1 year ago so may be I miss some points. Anyway, good luck!