Question

A company uses an EWMA model for forecasting volatility. It decides to change the parameter $\lambda$ from 0.95 to 0.85 . Explain the likely impact on the forecasts.

   A company uses an EWMA model for forecasting volatility. It decides to change the parameter $\lambda$ from 0.95 to 0.85 . Explain the likely impact on the forecasts.

Options, Futures, and Other Derivatives

Options, Futures, and Other Derivatives

John C. Hull 10th Edition

Chapter 23, Problem 4

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The parameter $\lambda$ in the EWMA model represents the weight given to the most recent observation. When the parameter $\lambda$ is changed from 0.95 to 0.85, it means that the model will give less weight to the most recent observation and more weight to the Show more…

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A company uses an EWMA model for forecasting volatility. It decides to change the parameter $\lambda$ from 0.95 to 0.85 . Explain the likely impact on the forecasts.

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