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.

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