Question 22

One of the most popular methods for estimating volatility is the generalized autoregressive conditional heteroskedastic (GARCH)(1,1) model. Assume the parameters of a GARCH(1,1) model are as follows: weighted long-run variance is 0.00005, weighting on the previous period's return is 0.03, and weighting on the previous variance estimate is 0.94. If daily volatility is estimated to be 2%, and today's stock market return is 0.6%, what is the new estimate of standard deviation?