The parameters in a GARCH (1,1) model are: omega =0.000002, alpha = 0.04, and beta = 0.95 . The current estimate of the volatility level is 1% per day
If we observe a change in the value of the variable equal to 2%, how does the estimate of the volatility change
A. 1.26%
B. 1.16%
C. 1.06%
D. 1.03%
C
The new variance rate is 0.000002+0.04×0.022+0.95×0.012 = 0.000113 . The new volatility is the square root of this or 1.06%
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