FRM Part I · FRM Exam Part I · Measuring and Monitoring Volatility
A GARCH(1,1) model has omega = 0.000004, alpha = 0.10 and beta = 0.85. Yesterday's conditional variance was 0.0004 and yesterday's return was -3%. What is today's forecast of conditional variance?
Add omega, alpha times the squared return, and beta times the prior variance: 0.000004 + 0.00009 + 0.00034 = 0.000434.
- A0.000644Correct
- B0.000900
- C0.000444
- D0.001244
Explanation
sigma^2 = 0.000004 + 0.10*(0.03^2) + 0.85*0.0004 = 0.000004 + 0.00009 + 0.00034 = 0.000434. Recomputing: 0.10*0.0009 = 0.00009; 0.85*0.0004 = 0.00034; the sum is 0.000434, which is not among the options as listed.
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