Value-at-Risk

Chapter 4, Page 180
Exercise 7

In our Mt. Washington example, each recorded high temperature^tx₁ is associated with the specific integer point in time t, but might have been realized at any point during a 24-hour period. Give two examples of financial time series:

1. one for which values ^tx are actually realized at a specific time t, and

2. another for which values ^tx may be realized at any time in an interval that we associate with time t.

Solution

Various solutions are possible for this exercise. Consider the following.

1. Measure time t in trading days. Consider a time series ^tx of daily settlement prices for a particular futures contract. Each day’s settlement price is set by the exchange at the close of trading each day.

2. Measure time t in trading days. Consider a time series ^tx of daily closing prices for a particular stock. Each day’s closing price is the price of the day’s last transaction in that stock, and the stock’s last transaction could occur at any point during the trading day.