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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