Financial Risk Manager Part 1
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A newly appointed entry-level risk analyst is in the process of constructing a model to quantify the volatility of a specific market variable. The analyst is deliberating between two volatility models: the Exponentially Weighted Moving Average (EWMA) and the Generalized Autoregressive Conditional Heteroskedasticity (GARCH(1,1)). Which of the following statements correctly characterizes the attributes of these two models?
A newly appointed entry-level risk analyst is in the process of constructing a model to quantify the volatility of a specific market variable. The analyst is deliberating between two volatility models: the Exponentially Weighted Moving Average (EWMA) and the Generalized Autoregressive Conditional Heteroskedasticity (GARCH(1,1)). Which of the following statements correctly characterizes the attributes of these two models?
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A
1 The EWMA model is a special case of the GARCH(1,1) model with the additional assumption that the long-run volatility is zero.
18.1%
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.
17.0%
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