Finance Question

Topics in Volatility

INSTRUCTIONS: Answer all questions. You may use any references but do not discuss this exam with anyone else.

1. What is an asymmetric volatility model?

a) Give an example with the formula and some estimated coefficients from VLAB. Use Philippines Exchange Index (PSEI) and the GJR-GARCH model. (Hint, you will have to check the box as an intermediate user to see the coefficients.)

http://vlab.stern.nyu.edu/ to do the work. All the things required on question one can be done without logging in. Log in is only for professors at school. Vlab is a free software to use without a log in.

http://vlab.stern.nyu.edu/analysis/VOL.PCOMP:IND-R.GJR-GARCH

b) Plot the volatility over the last 3 months for both GJR and conventional GARCH and attach them to this exam. Describe the differences. Comment on the effect of the November typhoon.

c) Compare the one week and one year forecasts from these two models. Look below the plot. Why do you think these are different?

2. What do we mean by the “volatility of volatility?” Why is this important in comparing long run risk and short run risk.

3. What is the difference between a conditional correlation and an unconditional correlation? Describe two ways to estimate conditional correlations.

4. SRISK is a measure of systemic risk that is used in VLAB to monitor systemic risk.

How does risk depend upon time variation in correlation?