Garch formula

balajismz
Finance Junkie
Posts: 63
Joined: Mon Nov 05, 2012 9:13 am

Garch formula

In Garch formula

what is the long term volatility and Avg Variance??

I reckon alpha0 or the 1st term is the Long term volatility and gamma is the Avg Variance.

But I am finding different references in different materials. Can someone give a try

Balaji

swarnendupathak
Finance Junkie
Posts: 119
Joined: Mon Sep 17, 2012 11:06 am

Re: Garch formula

The GARCH (1,1) model is very similar to EWMA model. The GARCH (1,1) model looks like w+alpha*previous day mean^2+Beta*previous day variance.
here beta = lambda as denoted by risk metrics.
alpha = (1-lambda)
w = weighted long run variance, i.e. long run variance*gamma
where alpha+beta+gamma = 1

Swarnendu

balajismz
Finance Junkie
Posts: 63
Joined: Mon Nov 05, 2012 9:13 am

Re: Garch formula

So what does Avg Variance mean and Long term Avg volatility??

Balaji

content.pristine
Finance Junkie
Posts: 356
Joined: Wed Apr 11, 2012 11:26 am

Re: Garch formula

Hi Balaji,

Check out the classroom recordings on GARCH.
It will provide you with why we use GARCH and a good explanation of each of the terms in the GARCH equation.

Let me know if you are still in doubt..