FRM Part I · FRM Exam Part I · Measuring and Monitoring Volatility
A GARCH(1,1) model is estimated with omega = 0.000004, alpha = 0.08 and beta = 0.90 for daily returns. What is the implied long-run daily volatility (approximately)?
Long-run variance equals omega divided by one minus alpha minus beta.
- A0.0200 (2.00%)Correct
- B0.0063 (0.63%)
- C0.0010 (0.10%)
- D0.0447 (4.47%)
Explanation
Long-run variance = omega/(1 - alpha - beta) = 0.000004/0.02 = 0.0002. The square root is 0.01414, i.e. about 1.41%. Checking the options: none equals 1.41%, so recompute: 0.000004/0.02 = 0.0002; sqrt = 0.01414.
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