hard · FRM Part 1

For a GARCH(1,1) model, if the volatility term structure is currently upward-sloping, what does this imply about the relationship between the daily return r_t-1 and the prior variance σ_t-1^2?

1. The prior squared return was significantly higher than the long-run variance.
2. The ω parameter must be negative to offset the high β.
3. The persistence parameter must be greater than one.
4. The current conditional variance is lower than the long-run equilibrium variance.

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