It is difficult to determine the appropriate explanatory variables for use in pure time-series modelsĬorrect! However, pure time-series models don't have a strong theoretical motivation. They cannot be used for very high frequency data Which of the following is a DISADVANTAGE of using pure time-series models (relative to structural models)?

This is to be expected since if the returns were highly dependent upon their previous values, it would be easy to generate a trading rule that exploited this feature, such that the autocorrelation would quickly disappear. Asset returns usually show very low autocorrelation. Although price series (or log-price series) are usually best characterised as unit root processes, returns definitely have no trend - either deterministic or stochastic. They are usually more peaked at the mean as well.

Incorrect! Most asset return distributions are leptokurtic - that is, they are 'fat-tailed', or have more of the distribution in the tails than would a normal distribution with the same mean and variance. Which of the following is a typical characteristic of financial asset return time-series?Ĭorrect! Most asset return distributions are leptokurtic - that is, they are 'fat-tailed', or have more of the distribution in the tails than would a normal distribution with the same mean and variance.

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