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Basic Question 6 of 11
The AR(1) model predicts if xt is at its mean-reverting level, then
II. xt = xt-1.
III. xt = xt+1.
IV. xt = b0 + b1xt.
I. xt = b0/(1 - b1).
II. xt = xt-1.
III. xt = xt+1.
IV. xt = b0 + b1xt.
User Contributed Comments 3
| User | Comment |
|---|---|
| bmeisner | How is II correct? Just because a series is at it's mean-reverting level in Xt doesn't mean it was at the mean-reverting level in the previous period Xt-1. |
| ucsbdan | See P389 of the textbook: "If a time series is currently at its mean-reverting level, then the model predicts that the value of the time series will be the same in the next period." So II is correct. |
| rhardin | That's not what bmeisner was saying... the question does not tell us if the series was at a mean reverting level last period (which would thus mean that it is mean reverting this period). So, bmeisner is correct because the question never told us if the series was at the mean reverting level last period. |
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Learning Outcome Statements
explain the instability of coefficients of time-series models;
describe characteristics of random walk processes and contrast them to covariance stationary processes;
CFA® 2025 Level II Curriculum, Volume 1, Module 5.