The file m-mrk4603.txt contains monthly simple returns of Merck stock from June 1946 to December 2003. The file has two columns denoting date and simple return. Transform the simple returns to log returns.
(a) Is there any evidence of serial correlations in the log returns? Use autocorrelations and 5% significance level to answer the question. If yes, remove the serial correlations.
(b) Is there any evidence of ARCH effects in the log returns? Use the residual series if there is serial correlation in part (a). Use Ljung-Box statistics for the squared returns (or residuals) with 6 and 12 lags of autocorrelation and 5% significance level to answer the question.
(c) Identify an ARCH model for the data and fit the identified model. Write down the fitted model.