Suppose that the monthly log returns in percentages of a, Financial Management

Suppose that the monthly log returns in percentages of a

Suppose that the monthly log returns, in percentages, of a stock follow the following Markov switching model:

where the transition probabilities are

Suppose that a₁₀₀= 6.0, = 50.0, and s₁₀₀= 2 with probability 1.0. What is the 1-step ahead volatility forecast at the forecast origin t = 100? Also, if the probability of s₁₀₀ = 2 is reduced to 0.8, what is the 1-step ahead volatility forecast at the forecast origin t = 100?

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