Question #101
Reading: Reading 2 Time-Series Analysis
PDF File: Reading 2 Time-Series Analysis.pdf
Page: 47
Status: Unattempted
Correct Answer: A
Question
Which of the following statements regarding unit roots in a time series is least accurate?
Answer Choices:
A. A time series that is a random walk has a unit root
B. A time series with a unit root is not covariance stationary
C. Even if a time series has a unit root, the predictions from the estimated model are valid
Explanation
The presence of a unit root means that the least squares regression procedure that we
have been using to estimate an AR(1) model cannot be used without transforming the data
first.
A time series with a unit root will follow a random walk process. Since a time series that
follows a random walk is not covariance stationary, modeling such a time series in an AR
model can lead to incorrect statistical conclusions, and decisions made on the basis of
these conclusions may be wrong. Unit roots are most likely to occur in time series that
trend over time or have a seasonal element.