Which of the following four statements on models for estimating volatility is INCORRECT?
A. In the exponentially weighted moving average (EWMA) model, some positive weight is assigned to the long-run average variance.
B. In the EWMA model, the weights assigned to observations decrease exponentially as the observations become older.
C. In the GARCH (1, 1) model, a positive weight is estimated for the long-run average variance.
D. In the GARCH (1, 1) model, the weights estimated for observations decrease exponentially as the observations become older.
Answer:A
The EWMA model does not involve the long-run average variance in updating volatility, in other words, the weight assigned to the long-run average variance is zero. Only the current estimate of the variance is used. The other statements are all correct.