Hi,
Based on the explanations of the answers, shall it be both A & B?
Course Name: Trading Alphas: Mining, Optimisation, and System Design, Section No: 14, Unit No: 7, Unit type: Quiz
Hi,
Let’s revisit the statements with a concept called volatility clustering in mind.
Volatility clustering is the idea that:
- High volatility tends to be followed by high volatility, and
- Low volatility tends to be followed by low volatility.
This is a well-known phenomenon in financial time series and underpins models like GARCH.
Statement A is correct in the context of volatility clustering.
When volatility is low, volatility clustering suggests that low volatility is likely to continue, and we may not observe sudden reversal. So a reversal at the lower limit is less likely.You’d not expect a sharp rise in volatility immediately, it may stay suppressed for a while.
Statement B - Not necessarily correct in volatility clustering context.
Volatility clustering implies that high volatility can persist at elevated levels. Just because volatility hits an upper limit doesn’t mean it will reverse immediately.