Financial Risk Manager Part 1
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A junior risk analyst is in the process of evaluating the variability of a particular market factor. The analyst is considering whether to apply the Exponentially Weighted Moving Average (EWMA) model or the Generalized Autoregressive Conditional Heteroskedasticity (GARCH) model, specifically the GARCH (1,1) variant. Which of the following statements is correct?
A
The EWMA model is a special case of the GARCH (1,1) model with the additional assumption that the long-run volatility is zero.
B
A variance estimated from the GARCH (1,1) model is a weighted average of the prior day's estimated variance and the prior day's squared return.
C
The GARCH (1,1) model assigns a higher weight to the prior day's estimated variance than the EWMA model.
D
A variance estimated from the EWMA model is a weighted average of the prior day's estimated variance and the prior day's squared return.