Question

At the end of Thursday, the estimated covariance between assets A and B is 0.0001. During Friday asset A produces a return of 3% and asset B produces a return of zero. An EWMA model with lambda equal to 0.9 is used. What is an estimate of the covariance at the end of Friday?

Answer 1

0.471404521

Step-by-step explanation:

The new covariance estimate is

0.90 x 0.0001+0.05 x 0.03 x 0 = 0.00009

The new variance estimate for asset A is

0.90 x 0.022 + 0.05 x 0.032 = 0.000405

So, the new volatility for A= (0.000405)1/2 = 0.020124612

The new variance estimate for asset B is

0.90 x 0.012 + 0.05 x 02 = 0.00009

So, the new volatility for A= (0.00009)1/2 =0.009486833

The new correlation estimate is

0.00009/(0.020124612 x 0.009486833) = 0.471404521