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Joined: Fri Jan 27, 2017 8:05 am


Postby jravi044 » Thu May 04, 2017 11:06 am

Question : A risk manager estimates the daily variance (ht) using a GARCH model on daily returns (rt):
ht= Alfa0 + Alfa1r2t-1 + Betaht-1
Assume the model parameter values are Alfa0= 0.005, Alfa1= 0.04, Beta = 0.94. The long-run annualized volatility is approximately:

Answer:The long-run variance is 0.005/(1- 0.04 - m0.94) =0.005/0.02 = 0.25. The daily volatility is thus the square root, or 0.5% and annual volatility 7.935%

Doubt : I want to know how to find the long run annualised volatility .
why this square root is used in the answer?
why square root of 05%?

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