1
, INV4801
ASSIGNMENT 2 2026
DUE 19 AUGUST 2026
Question 1
Given Information:
α (alpha) = -0.08
γ (gamma) = 0.00010
β (beta) = 0.35
Daily standard deviation (long-run average) = 1% = 0.01
Previous period estimated variance (σ²ₜ₋₁) = 0.0144
Comparable company estimated standard deviation (This is a distractor; we use the previous
variance)
Current period return surprise (ε²ₜ₋₁) = 7.77% = 0.0777 (Note: In GARCH, we square the
return shock. While the problem says “return is 7.77% above expected”, this is the shock itself.
We use the square of this value).
(i) Compute the conditional variance for today using the re-parameterized GARCH (1,1)
The re-parameterized GARCH (1,1) equation is written as:
= + −1
+ −1
Where ω (omega) is the long-run average variance weighted by (1 - α - β). We calculate it as:
= × (1 − − )
Step 1: Calculate ω
= 0.00010 × (1 − ( − 0.08) − 0.35)
2
, INV4801
ASSIGNMENT 2 2026
DUE 19 AUGUST 2026
Question 1
Given Information:
α (alpha) = -0.08
γ (gamma) = 0.00010
β (beta) = 0.35
Daily standard deviation (long-run average) = 1% = 0.01
Previous period estimated variance (σ²ₜ₋₁) = 0.0144
Comparable company estimated standard deviation (This is a distractor; we use the previous
variance)
Current period return surprise (ε²ₜ₋₁) = 7.77% = 0.0777 (Note: In GARCH, we square the
return shock. While the problem says “return is 7.77% above expected”, this is the shock itself.
We use the square of this value).
(i) Compute the conditional variance for today using the re-parameterized GARCH (1,1)
The re-parameterized GARCH (1,1) equation is written as:
= + −1
+ −1
Where ω (omega) is the long-run average variance weighted by (1 - α - β). We calculate it as:
= × (1 − − )
Step 1: Calculate ω
= 0.00010 × (1 − ( − 0.08) − 0.35)
2
