Question #95 - Reading 2 Time-Series Analysis

Reading: Reading 2 Time-Series Analysis

PDF File: Reading 2 Time-Series Analysis.pdf

Page: 45

Status: Unattempted

Correct Answer: A

Shared Context

- After discussing the above matter with a colleague, Bert finally decides to use an annual autoregressive model of Order One [i.e., AR(1)]. Using the data in Exhibit 1, calculate the mean reverting level of the series. A) 1.66. B) 1.26. C) 1.46.

Question

Bert is aware that the Dickey Fuller test can be used to discover whether a model has a unit root. He is also aware that the test would use a revised set of critical t-values. What would it mean to Bert to reject the null of the Dickey Fuller test (Ho: g = 0)?

Answer Choices:

A. There is a unit root and the model cannot be used in its current form

B. There is a unit root but the model can be used if covariance-stationary

C. There is no unit root

Explanation

The null hypothesis of g = 0 actually means that b1 – 1 = 0, this will be the case if b1 = 1. Since we have rejected the null, we can conclude that the model has no unit root.

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