VRM 3. Volatility: LOs

a) Explain how asset return distributions tend to deviate from the normal distribution.

b) Explain reasons for fat tails in a return distribution and describe their implications.

c) Distinguish between conditional and unconditional distributions.

d) Describe the implications of regime switching on quantifying volatility.

e) Compare and contrast different parametric and non-parametric approaches for estimating conditional volatility.

f) Calculate conditional volatility using parametric and non-parametric approaches.

g) Evaluate implied volatility as a predictor of future volatility and its shortcomings.

h) Apply the exponentially weighted moving average (EWMA) approach and the GARCH (1,1) model to estimate volatility.

i) Explain and apply approaches to estimate long horizon volatility/VaR and describe the process of mean reversion according to a GARCH (1,1) model.

j) Calculate conditional volatility with and without mean reversion.

k) Describe the impact of mean reversion on long horizon conditional volatility estimation.

l) Describe an example of updating correlation estimates.