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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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