Question

Suppose that the parameters in a GARCH(1,1) model are = 0.03, = 0.95 and  = 0.000002.
(a) What is the long-run average volatility?
(b) If the current volatility is 1.5% per day, what is your estimate of the
volatility in 20, 40, and 60 days?
(c) What volatility should be used to price 20-, 40-, and 60-day options?
(d) Suppose that there is an event that increases the volatility from 1.5% per day to 2% per day. Estimate the effect on the volatility in 20, 40, and 60 days.
(e) Estimate by how much the event increases the volatilities used to price 20-, 40-, and 60-day options.


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  • CreatedJuly 30, 2015
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