Consider the following AR(1) model with the disturbances having zero mean and unit variance: y = 0

Finance Dec 27, 2020

Consider the following AR(1) model with the disturbances having zero mean and unit variance: y = 0.4 +0.27:- +2. The (unconditional) variance of y will be given by ? Select one: a. 2 b. 0.96 1.25 d. None of the options e. 1.04

Expert Solution

In this case variance of distrubance = 1/[1 - (autoregressive coefficient)²]

Where autoregressive coefficient = 0.2

The unconditional variance = 1/[1 - (0.2^2)]

= 1/0.96

= 1.04

So the correct option is 'e'

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