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Question 9 (12 marks | Word limit: 400 words)
Assume that we have estimated the following AR(1) model:
Xt = 0.0825 + 0.7654Xt – 1 + et
Furthermore, assume that the current level of X is 0.4968.
(a) Forecast the value of X at time 1 (X1) and time 4 (X4). (2 marks)
(b) Which of these two forecasts is likely to be more reliable? Why? (2 marks)
(c) What is serial correlation? How do we test for its presence in this model? (4 marks)
(d) What is the mean reverting level of this model? What does this mean? (4 marks)
Assume that we have estimated the following AR(1) model:
Xt = 0.0825 + 0.7654Xt – 1 + et
Furthermore, assume that the current level of X is 0.4968.
(a) Forecast the value of X at time 1 (X1) and time 4 (X4). (2 marks)
(b) Which of these two forecasts is likely to be more reliable? Why? (2 marks)
(c) What is serial correlation? How do we test for its presence in this model? (4 marks)
(d) What is the mean reverting level of this model? What does this mean? (4 marks)
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