Financial Risk Manager Part 1
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Unlike structural models, pure time series models do not incorporate any explanatory variable. Which of the following is a disadvantage of pure time series models when compared to the structural models?
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NNikitesh
A
They are not theoretically motivated
B
They cannot produce forecasts easily
C
They cannot be used when the data has a very high frequency
D
It's difficult to select the most appropriate explanatory variables to include in a pure time-series model
Explanation:
Pure time series models have very weak theoretical backing. For instance, it might be difficult to see why the current value of a stock return should be related to its past values and to the values of a random error process. It would be more theoretical to explain return fluctuations using some macroeconomic variables that influence profitability, such as the state of the economy as a whole.
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