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Basic Question 1 of 5
What are correct characteristics of a random walk process (LOS h)?
II. It is not covariance-stationary.
III. If an AR(1) model has b0 = 1 and b1 = 0, it becomes a random walk time series.
IV. There is no best forecast of xt that can be made in period t - 1 since the value of xt is random.
I. It is not mean-reverting.
II. It is not covariance-stationary.
III. If an AR(1) model has b0 = 1 and b1 = 0, it becomes a random walk time series.
IV. There is no best forecast of xt that can be made in period t - 1 since the value of xt is random.
User Contributed Comments 3
| User | Comment |
|---|---|
| MasterD | 1) A random walk is a special case of AR(1) where B0 = 0 and B1 = 1 (not as in III). Thus the mean reverting level = B0/(1-B1) = 0/0 and thus undefined. The textbook does state that "Therefore, a first-differenced random walk has a mean-reverting level of 0." |
| nsmwaura | A random walk is where the predicted value of a series inn one period is equal to the value of the seris in the previous period plus a random error term. |
| nsmwaura | B0 can be=0 if its random walk without a drift or not=0 if its a random walk with a drift. Eitherway, the meanreverting level will be undefined. |
I am using your study notes and I know of at least 5 other friends of mine who used it and passed the exam last Dec. Keep up your great work!
Barnes
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;
describe implications of unit roots for time-series analysis, explain when unit roots are likely to occur and how to test for them, and demonstrate how a time series with a unit root can be transformed so it can be analyzed with an AR model;
CFA® 2024 Level II Curriculum, Volume 1, Module 5.