GARCH (Generalized Autoregressive Conditional Heteroskedasticity) models are statistical tools used to predict future volatility in financial markets by modeling the changing variance of a time series. These models help capture the tendency of financial returns to exhibit periods of high and low volatility, which is essential for pricing exotic options that often depend on underlying asset price movements and their uncertainties. Understanding GARCH models allows traders and risk managers to make informed decisions regarding option pricing and risk assessment in various market conditions.
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