2. Assume that an index at close of trading yesterday was 1,040 and
the daily volatility of the index was estimated as 1% per day at
that time. The parameters in a GARCH(1,1) model are ω = 0.000002, α
= 0.06, and β = 0.92. If the level of the index at close of trading
today is 1,060, what is the new volatility estimate?
This question asks for new volatility i.e new standard deviation
Price at opening of index = 1040
Price at closing of index = 1060
Profit made =20
U(n-1)= 20/1040 = 0.0192
Variance = = 0.0001162
Hence, standard deviation = = 0.01078 = 1.078%
Hence, the new volatility estimate is 1.078% per day.
2. Assume that an index at close of trading yesterday was 1,040 and the daily volatility...
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