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Measuring and managing market, credit and Op risk [31]

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Bullet points include: Financial returns are often not independent over time Volatility seems to be forecastable Does not mean that can make money from this – there is, at any point in time, a ‘term structure’ to implied volatility and risk appetite may change Large absolute magnitude returns today tend to be followed by larger than average absolute magnitude returns tomorrow A common approach to modelling this is to employ Generalised Autoregressive Conditional Heteroscedasticity (GARCH) models, see Appendix B

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