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Extreme Events – Specimen Question A.2.2

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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?

 

Answer/Hints

 

(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.

 

Answer/Hints

 

(c)    Prepare a standardised quantile-quantile plot for this underlying return series. Does it appear to exhibit fat-tailed behaviour?

 

Answer/Hints

 


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