Question

Suppose that the price of an asset at close of trading yesterday was $220 and its...

Suppose that the price of an asset at close of trading yesterday was $220 and its volatility was estimated as 1.3% per day. The price at the close of trading today is $222. Update the volatility estimate using:

(a) The EWMA model with ? = 0.88.

(b) The GARCH(1,1) model with ? = 0.00004, ? = 0.05, and ? = 0.93.

(c) Given the information above, what is the long-run average variance? ( (d) What is the main difference between the two approaches, i.e. EWMA and GARCH?

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