Suppose that the daily volatilities of asset A and asset B calculated at the close of trading
Question:
Suppose that the daily volatilities of asset A and asset B calculated at the close of trading yesterday are 1.6% and 2.5%, respectively. The prices of the assets at close of trading yesterday were $20 and $40 and the estimate of the coefficient of correlation between the returns on the two assets was 0.25. The parameter λ used in the EWMA model is 0.95.
(a) Calculate the current estimate of the covariance between the assets.
(b) On the assumption that the prices of the assets at close of trading today are $20.5 and $40.5, update the correlation estimate.
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a The volatilities and correlation imply that the current estimate of the covariance is ...View the full answer
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