Answer-first summary for fast verification
Answer:
The solution shows that the correct answer is D. EWMA is indeed a special case of GARCH(1,1) where the weight for the long-run average variance (ω) is zero, and the weights for the previous variance (β) and squared return (α) sum to 1. This makes EWMA a simplified version of GARCH that doesn't incorporate mean reversion to a long-term variance level.
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D is correct. The EWMA estimate of variance is a weighted average of the variance rate estimated for the prior day and the prior day's observed squared return. A is incorrect. EWMA is a particular case of GARCH (1,1) with the weight assigned to the long-run average variance rate as zero and the sum of the weights of the other two parameters equal to 1. B is incorrect because there is also weight assigned to the long-run average variance rate. C is incorrect because such a comparison can only be done under specific parameter configurations.
A
B
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