Question #78
Reading: Reading 2 Time-Series Analysis
PDF File: Reading 2 Time-Series Analysis.pdf
Page: 38
Status: Unattempted
Question
Alexis Popov, CFA, is analyzing monthly data. Popov has estimated the model xt = b0 + b1 × xt-1 + b2 × xt-2 + et. The researcher finds that the residuals have a significant ARCH process. The best solution to this is to:
Answer Choices:
A. re-estimate the model using only an AR(1) specification
B. re-estimate the model using a seasonal lag
C. re-estimate the model with generalized least squares
Explanation
If the residuals have an ARCH process, then the correct remedy is generalized least
squares which will allow Popov to better interpret the results.