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Extreme Events – Specimen Question A.6.1(c) – Answer/Hints

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Q. What other sorts of observations arising in financial series might be ones that you would question?

 

These would include ones that appear intrinsically implausible in the context of how effective price formation ‘ought’ to work. Perhaps the most important of these is if the prices show an unreasonably smooth progression. This might indicate that the prices are ‘stale’, i.e. not current, particularly if the price series is constant. Or, it might indicate that the prices were fictitious and perhaps fraudulent, if the price and/or return series exhibits an implausibly high risk/return trade-off.

 


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