CH19 estimating volatilities and correlations

. Estimating Volatilities and Correlations Chapter 20 Standard Approach to Estimating Volatility (page 461)  Define σ n as the volatility per day between day n-1 and day n, as estimated. (Table 19.1, page 469)  Start with trial values of ω, α, and β  Update variances  Calculate  Use solver to search for values of ω, α, and β that maximize this objective function  Important. =1 2 1 2 1 2 −− βσ+α+γ=σ nnLn uV GARCH (1,1) continued Setting ω = γV the GARCH (1,1) model is and β−α− ω = 1 L V 2 1 2 1 2 −− βσ+α+ω=σ nnn u Example (Example 19.2, page 465)  Suppose  The