Extreme Events – Specimen Question A.2.2
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Question and Answer Summary
You are an investor seeking to understand the behaviour of Index B:
(a) You think that
the returns shown for Index B may exhibit a material element of smoothing. What
sorts of assets might lead to this type of behaviour?
(b) Using a first order
autoregressive model, de-smooth the observed returns for Index B to derive a
return series that you think may provide a better measure of the underlying
behaviour of the relevant asset category.
(c) Prepare a
standardised quantile-quantile plot for this underlying return series. Does it
appear to exhibit fat-tailed behaviour?
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