Question

Section 1: True/False, & explain why in two or three sentences:

5. You are trying to forecast the quarterly US dollar-Euro exchange rate as a function of the dollar-Euro exchange rate in the previous quarter and the quarter before that. This is an autoregressive model with order 3.

Answer 1

We are here trying to forecast the exchange rate as a function of the values of two previous quarters.

An autoregressive model is a model where a time series value is regressed on previous values. Hence, this is an autoregressive model.

Now, let's check the order of the model. In general, in k^th order autoregressive model, value at time 't' is predicted by values at time t-1, t-2... t-k. In this example, we are predicting the value by using the values at time t-1 and t-2. Hence, this is an autoregressive model of order 2 denoted by AR (2).

Answer: FALSE