medium · Quantitative Finance prob-stats
A proprietary trader uses a GARCH(1,1) model to forecast volatility for his Monte Carlo engine.
If the GARCH persistence α + β is very close to 1, what is the implication for the simulation?
- Volatility shocks will decay very slowly over the simulated paths
- The long-run variance σ^2_LR will be zero
- Antithetic variates will become invalid for GARCH-based simulations
- The simulation will converge faster because of the stability of the GARCH process
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