Extreme Events – Specimen Question
A.3.1(b) – Answer/Hints
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Q. If you had to select
between either Index A or Index B to backfill data for Index C as per (a),
which would you use? Why?
The natural one to use is Index B, since it has a much
higher correlation with Index C than Index A over the period when both are
present. The logged returns over these periods and correlation coefficients are:
|
Period
|
A (logged return)
|
B (logged return)
|
C (logged return)
|
|
8
|
0.0099503
|
0.0276152
|
0.0305292
|
|
9
|
0.0704585
|
0.1231022
|
0.0449734
|
|
10
|
-0.1278334
|
0.0148886
|
-0.0779615
|
|
11
|
0.0069756
|
-0.1109316
|
-0.1109316
|
|
12
|
0.0079682
|
0.1106465
|
0.0382587
|
|
13
|
-0.0387408
|
0.1646666
|
0.0506931
|
|
14
|
0.0276152
|
0.0925792
|
0.0009995
|
|
15
|
-0.0439519
|
0.0797350
|
0.0344014
|
|
16
|
-0.0120726
|
-0.0650720
|
-0.0294288
|
|
17
|
-0.0725707
|
-0.0812101
|
-0.1142891
|
|
18
|
0.0629748
|
-0.0232686
|
0.0246926
|
|
19
|
0.0353671
|
0.0525925
|
0.0610951
|
|
20
|
0.0178399
|
0.0276152
|
0.0237165
|
|
|
|
|
|
|
Correlation with C
|
0.16
|
0.78
|
|
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