What is the new estimate of correlation between two asset

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Consider there are two assets A and B and their current daily volatilities are 2.3% and 1.5%, respectively. The close prices of the two assets yesterday were $25 for asset A, and $45 for asset B. The correlation coefficient between the two assets' returns estimated today is 0.30. Covariance and volatilities equations of the two assets are modelled using a GARCH(1,1) model. For simplicity, assume that the models' estimates parameters are alpha equals 0.05 and beta equals 0.82. For the covariance equation, omega equals 0.000002, and for the volatility equation, omega equals 0.000005. The close prices of asset A, and B, observed today are $32 and $47, respectively.

Question 1: What is the new estimate of the covariance between the two assets?

Question 2: What is the new estimate of the correlation between the two assets?

Reference no: EM133000172

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