hard · FRM Part 1 Quantitative Analysis
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?
- The prior squared return was significantly higher than the long-run variance.
- The ω parameter must be negative to offset the high β.
- The persistence parameter must be greater than one.
- The current conditional variance is lower than the long-run equilibrium variance.
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