*** because noone replied to my previous message, I will send it one more
time - maybe this time I'll be luckier ***


Dear list members,

I am trying to estimate parameters of the AR(1)-GARCH(1,1) model. I have one
additional dummy variable for the AR(1) part.
First I wanted to do it using garchFit function (everything would be then
estimated in one step) however in the fGarch library I didn't find a way to
include an additional variable.
That would be the formula but, as said, I think it is impossible to add a
variable:

garchFit(formula = ~ arma(1,0) + garch(1,1), data=x, include.mean=TRUE)


For that reason I decided to do everything in 2 steps. First I estimate the
AR parameters using arima function because here I can include additional
variable and then, in the second step, I estimate the GARCH part of the
model on the residuals from the AR model.
So, this is how I define the additional dummy variable:

d<-rep(0,991)
for (i in 850:922)
    d[i]<-1;

and now the 2 steps:

step1 = arima(x, order = c(1,0,0), xreg=d, include.mean = TRUE)
step2 = garch (step1$res, order = c(1,1), include.intercept = TRUE)


The argument 'xreg' apparently allows me to include another variable.

At this point I wanted to ask you what do you think about the code. Do you
think everything is reasonable and correct?

Ok. And now to the problem I encountered.
In the 2nd step, the program cannot finish the estimation. This is what it
shows:


***** ESTIMATION WITH ANALYTICAL GRADIENT *****


     I     INITIAL X(I)        D(I)

     1     4.747742e-04     1.000e+00
     2     5.000000e-02     1.000e+00
     3     5.000000e-02     1.000e+00

    IT   NF      F         RELDF    PRELDF    RELDX   STPPAR   D*STEP
NPRELDF
     0    1 -3.241e+03
     1    9 -3.241e+03  6.72e-06  1.38e-05  4.7e-05  2.0e+09  4.7e-06
1.37e+04
     2   16 -3.242e+03  8.84e-05  1.18e-04  1.3e-01  2.0e+00  1.6e-02
8.77e-02
     3   20 -3.244e+03  6.76e-04  5.37e-04  6.9e-01  1.3e+00  2.6e-01
8.00e-03
     4   22 -3.244e+03  1.53e-04  1.55e-04  7.5e-02  2.0e+00  5.1e-02
1.84e-01
     5   24 -3.245e+03  2.69e-04  3.13e-04  1.2e-01  2.0e+00  1.0e-01
2.31e+01
     6   26 -3.246e+03  9.61e-05  1.57e-04  4.6e-02  1.5e+00  4.5e-02
7.85e-04
     7   27 -3.246e+03  3.77e-05  7.31e-05  4.2e-02  1.1e+00  4.5e-02
1.39e-04
     8   28 -3.246e+03  6.77e-05  3.45e-05  6.1e-03  0.0e+00  7.4e-03
3.45e-05
     9   30 -3.248e+03  6.91e-04  3.75e-04  6.4e-02  0.0e+00  8.1e-02
3.75e-04
    10   32 -3.249e+03  2.17e-04  2.28e-04  2.4e-02  1.8e+00  3.3e-02
2.46e-03
    11   34 -3.250e+03  3.51e-04  3.66e-04  4.5e-02  5.4e-01  6.5e-02
1.39e-03
    12   36 -3.252e+03  7.61e-04  5.08e-04  8.1e-02  3.4e-01  1.3e-01
1.53e-03
    13   44 -3.253e+03  4.73e-05  9.51e-05  1.1e-06  6.7e+00  1.9e-06
2.37e-01
    14   45 -3.253e+03  4.08e-07  5.59e-07  1.1e-06  2.0e+00  1.9e-06
2.79e-01
    15   46 -3.253e+03  1.69e-08  2.74e-08  1.1e-06  2.0e+00  1.9e-06
2.82e-01
    16   55 -3.258e+03  1.73e-03  8.48e-04  3.5e-02  2.0e+00  6.3e-02
2.81e-01
    17   57 -3.261e+03  7.56e-04  6.61e-04  6.8e-03  2.0e+00  1.3e-02
4.25e+01
    18   59 -3.268e+03  2.22e-03  1.74e-03  1.3e-02  2.0e+00  2.5e-02
8.22e+03
    19   61 -3.270e+03  5.11e-04  5.21e-04  2.6e-03  2.0e+00  5.1e-03
1.78e+06
    20   67 -3.270e+03  9.28e-06  1.72e-05  9.4e-08  2.7e+01  1.8e-07
9.25e+02
    21   68 -3.270e+03  5.41e-08  7.21e-08  9.3e-08  2.0e+00  1.8e-07
1.51e+03
    22   77 -3.272e+03  5.88e-04  1.12e-03  6.1e-03  2.0e+00  1.2e-02
1.51e+03
    23   79 -3.276e+03  1.41e-03  1.47e-03  4.9e-03  1.7e+00  1.2e-02
4.05e-02
    24   86 -3.276e+03  9.34e-06  9.36e-06  6.1e-09  2.9e+01  1.2e-08
1.11e-01
    25   88 -3.276e+03  1.83e-06  1.82e-06  1.2e-09  1.3e+02  2.4e-09
1.51e-01
    26   90 -3.276e+03  3.61e-06  3.61e-06  2.4e-09  1.7e+01  4.8e-09
1.50e-01
    27   92 -3.276e+03  7.14e-07  7.14e-07  4.8e-10  3.1e+02  9.5e-10
1.49e-01
    28   94 -3.276e+03  1.43e-07  1.43e-07  9.7e-11  1.5e+03  1.9e-10
1.49e-01
    29   96 -3.276e+03  2.85e-07  2.85e-07  1.9e-10  1.9e+02  3.8e-10
1.48e-01
    30   99 -3.276e+03  5.69e-09  5.69e-09  3.9e-12  3.8e+04  7.6e-12
1.48e-01
    31  101 -3.276e+03  1.14e-08  1.14e-08  7.7e-12  4.7e+03  1.5e-11
1.48e-01
    32  103 -3.276e+03  2.28e-08  2.28e-08  1.5e-11  2.4e+03  3.0e-11
1.48e-01
    33  107 -3.276e+03  4.55e-11  4.55e-11  3.1e-14  6.5e-01  6.1e-14
-1.08e-01
    34  109 -3.276e+03  9.11e-12  9.10e-12  6.2e-15  6.5e-01  1.2e-14
-1.08e-01
    35  111 -3.276e+03  1.82e-11  1.82e-11  1.2e-14  6.5e-01  2.4e-14
-1.08e-01
    36  113 -3.276e+03 -3.05e+06  3.64e-12  2.5e-15  6.5e-01  4.9e-15
-1.08e-01

 ***** FALSE CONVERGENCE *****

 FUNCTION    -3.276262e+03   RELDX        2.479e-15
 FUNC. EVALS     113         GRAD. EVALS      36
 PRELDF       3.642e-12      NPRELDF     -1.078e-01

     I      FINAL X(I)        D(I)          G(I)

     1    2.607871e-15     1.000e+00     2.453e+06
     2    2.088683e-02     1.000e+00     2.110e+03
     3    9.812705e-01     1.000e+00     1.556e+03

Warning message:
In sqrt(pred$e) : NaNs produced


Could anyone explain me what is the problem here and why the estimation
cannot be finished in this case? 'False convergence'....but I don't really
understand what is behind this message.


If anyone knows, please help R-sig-finance ;)

Thank you in advance
Greetings
Marcin

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