Skip to content

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 daily return was -2.0% and yesterday's conditional variance estimate was 0.0004. What is today's conditional daily volatility forecast?

Today's variance is omega plus alpha times squared return plus beta times prior variance: 0.000004 + 0.00004 + 0.00034 = 0.000384. The square root is about 1.96%, so the forecast is roughly 1.97%, the closest option.

  1. A1.97%Correct
  2. B2.00%
  3. C1.70%
  4. D2.21%

Explanation

r^2 = 0.0004. Variance = 0.000004 + 0.10*0.0004 + 0.85*0.0004 = 0.000004 + 0.00004 + 0.00034 = 0.000384. Square root = 0.0196, about 1.96%, closest to 1.97%. Omitting omega gives 0.000380 (1.95%), so omega matters but the key is the nearest value.

Did you get it right without looking?

One question tells you little. A timed set on Measuring and Monitoring Volatility shows your real accuracy, how long you take and where you lose marks.

Practise Measuring and Monitoring VolatilityFree diagnostic mock

More Measuring and Monitoring Volatility questions