What is the long-run average volatility

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Suppose that the parameters in a GARCH (1,1) model are α = 0.01, β = 0.96 and ω = 0.000002.

a. What is the long-run average volatility?

b. If the current volatility is 1.5% per day, what is your estimate of the volatility in 60 days?

c. What volatility should be used to price 60-day options?

d. Suppose that there is an event that increases the current volatility by 0.5% to 2% per day. Estimate the effect on the volatility in 60 days.

e. Estimate by how much the event increases the volatilities used to price 60-day options.

Reference no: EM133060292

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