Financial Risk Manager Part 1
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A novice risk analyst is in the process of creating a model to quantify the volatility of a specific market variable. The analyst is considering two different modeling approaches: the Exponentially Weighted Moving Average (EWMA) and the Generalized Autoregressive Conditional Heteroskedasticity model (GARCH(1,1)). Which one of the following statements is correct regarding these models?
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.