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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. |
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
describe the structure of an autoregressive (AR) model of order p and calculate one- and two-period-ahead forecasts given the estimated coefficients;
explain how autocorrelations of the residuals can be used to test whether the autoregressive model fits the time series;
explain mean reversion and calculate a mean-reverting level;
contrast in-sample and out-of-sample forecasts and compare the forecasting accuracy of different time-series models based on the root mean squared error criterion;
CFA® 2025 Level II Curriculum, Volume 1, Module 5.