GARCH(1,1) model
Suppose that the price of an asset at the close of trading yesterday was $350 and its volatility was estimated as 1.4% per day. The price at the close of trading today is $347. The proportional change in the price of the asset is -0.00857. What is the new volatility estimate when using a GARCH(1,1) model with ω = 0.000003, α = 0.05 and β = 0.95?
|
This option |
Or this |
|
= 0.03 + (0.05 × -0.85712) + (0.95 × 1.42) = 1.9287% So that the new daily volatility is: = = 1.3888%
|
= 0.000003 + (0.05 × -0.00857) + (0.95 × 0.0142) = 0.000003 + 0.000003672 + 0.0001862 = 0.000192872 = = 0.0138878 x 100 = 1.3888% or 1.39%
|
