Lecture 10: Estimate Volatility (con't)

Question 1

In practice, bad news tend to have a ? impact than good news because of:
- ?
- ? traders
=> ? response of volatility to news is often seen in practice

Answer 1

In practice, bad news tend to have a bigger impact than good news because of:
- leverage
- noise traders
=> asymmetric response of volatility to news is often seen in practice

Question 2

2 main models to capture asymmetric response of volatitily:

1. ?
2. ? GARCH

Answer 2

2 main models to capture asymmetric response of volatitily:

1. EGARCH
2. GJR GARCH

Question 3

EGARCH allows:

• bad news to have ? impact than good news
• ? news to have greater impact than unimportant news

Answer 3

EGARCH allows:

• bad news to have greater impact than good news
• big news to have greater impact than unimportant news

Question 4

GJR GARCH has a dummy variable D to magnify impact of ? news on ?? ‘s volatility:
D = 1 if news is ?
D = 0 if news is positive

Answer 4

GJR GARCH has a dummy variable D to magnify impact of bad news on next period’s volatility:
D = 1 if news is negative
D = 0 if news is positive

Question 5

GJR GARCH’s impact curve dominates on ? side but combines into standard GARCH(1,1)’s curve on ? side.

Answer 5

GJR GARCH’s impact curve dominates on negative side but combines into standard GARCH(1,1)’s curve on positive side.