Question

Suppose that the daily log return of a security follows the model: r_t =0.01+0.2r_t-2+e_t, where e is a white noise series with mean zero and variance 0.02. Assuming r₁₀₀ = -0.01 and r₉₉ = 0.02. Compute the 1-step and 2-step ahead forecasts of the return series at the forecast origin t=100. What are the associated standard deviations of the forecast errors?

Answer 1

Answer :

Given data is :

--------------->(1)

and mean = 0

Variance = = 0.02

where ~

Assume that ,

and

t = 100

Now consider ,eq (1)

We can write it as,

= Mean

Now variance is as follows :

=