Question

Suppose that the daily log return of a security follows the model: rt =0.01+0.2rt-2+et, where e...

Suppose that the daily log return of a security follows the model: rt =0.01+0.2rt-2+et, 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?

Homework Answers

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 :

=

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