The GARCH Process for Stock Prices Has Been Used to Better

question 7

Multiple Choice

The GARCH process for stock prices has been used to better fit option prices. Which of the following best describes why GARCH may be used to fit the options smile?

• A) GARCH is just one form of a stochastic volatility process and therefore random volatility causes the smile in the same way as does stochastic volatility.
• B) GARCH implies persistence in changes in volatility, which in turn usually makes the return distribution have non-zero skewness and kurtosis.
• C) GARCH volatility is deterministic and therefore causes the smile with certainty.
• D) None of the above.

---

Definitions:

Variability

Variability in statistics refers to how spread out or dispersed a set of data is, indicating the degree to which these data points differ from each other and from their average.

Degrees Of Freedom

The number of independent values in a statistical calculation that are free to vary.

Independent Variables

Variables in an analysis that are manipulated or categorized to determine their effect on dependent variables; essentially the same as explanatory variables but in a different context.

Skewed Left

Describes a distribution of data where the tail is longer on the left side of the distribution, indicating a larger number of lower values.