SOA Exam SRM Sample Question 38
Study guide: Exam SRM
You are given two models:
Model L:
y_t = \beta_0 + \beta_1 t + \varepsilon_t
where \{\varepsilon_t\} is a white noise process, for t = 0, 1, 2, \ldots
Model M:
\begin{aligned} y_t &= y_0 + \mu_c t + u_t \\ c_t &= y_t - y_{t-1} \\ u_t &= \textstyle\sum_{j=1}^{t} \varepsilon_j \end{aligned}
where \{\varepsilon_t\} is a white noise process, for t = 0, 1, 2, \ldots
Determine which of the following statements is/are true.
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I. Model L is a linear trend in time model where the error component is not a random walk.
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II. Model M is a random walk model where the error component of the model is also a random walk.
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III. The comparison between Model L and Model M is not clear when the parameter
\mu_c = 0. -
A) I only
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B) II only
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C) III only
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D) I, II and III
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E) The correct answer is not given by (A), (B), (C), or (D).
Answer this question and see the worked solution