p840-0331 - 2 Consider the MA(1 process y t = ε t θε t-1...

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Econ 840 Exercise for March 31 de Jong, Spring 2008 Answer the question below for Monday’s class. You do not need to hand in your answers. Below, as in the whole course, ε t and η t are i.i.d. regression errors. 1. Consider the difference equation y t - (3 / 4) y t - 1 + (1 / 8) y t - 2 = 0 . How do you write this difference equation in lag polynomial form? Will this difference equation have a stable solution?
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Unformatted text preview: 2. Consider the MA(1) process y t = ε t + θε t-1 . Can y t can display explosive behavior for any value of θ ? 3. Consider the VAR (Vector Auto Regressive) process ± y t z t ¶ = ± . 5 0 . 2 . 3 ¶± y t-1 z t-1 ¶ + ± ε t η t ¶ ε t and η t are stochastic “errors” here. Argue whether or not y t and/or z t are explosive. 1...
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This note was uploaded on 07/17/2008 for the course ECON 840 taught by Professor De jong during the Spring '08 term at Ohio State.

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