Reg No: Name:

Quiz 1
Financial Econometrics-term VI
2013-2014
Time=1 hr
Marks=20
For Question Numbers 1 and 2 please use the paper to write your
answer.
1.
a) Are the following processes weakly stationary ? Give the reasoning of your answer.
[2 Marks]

1
t t
y e = + ,
t
e ~ iidN(0,);
1
1 0.6
t t t
y y e
-
= + + ,
t
e ~ iidN(0,).
a) white noise=> stationary with mean=1 (constant) and
variance constant.


AR(1) 1 < | => stationary


2. For the following process, assume that
t
e ~ iidN(0,1)
1
0.25
t t t
y e e
-
= - ,

i) derive the mean ( ( )
t y
y E = ),
ii) derive the variance ( ( )
t
y V =
0
), and
iii) derive the first two autocorrelations,
1
and
2
, where
0

k
k
= .
[4Marks]

i) mean =0, MA(1) model


ii) Variance 0625 . 1 ) 1 (
2 2
= + o u

(iii)
235 .
1
) 1 ( 0
2
1
2
=
+

=
=
u
u

asMA




For this part paste your result in the boxes and use to mark
the following two questions.
3. Consider the monthly U.S. 30-year mortgage rate.
(a) Is the mortgage rate stationary? Test for the presence of Unit root using R. [3 marks]

Yes No

(b) Based on your result in part (a) fit the best model for mortgage rate or differenced
mortgage (depending on your result in part (a)) using arima function and check for
the model adequacy using all residual check, aic check, log-likelihood check. Which
of the following you choose:
[6 marks] AR(3) MA(1) ARMA(1,1) ARMA (3,1)


(c) Do the forecast for the best fitted model based on part b for the 11 months of 2011.
Give the forecasted values along with Se and also plot the forecast. [5 Mark]
ime Series:
Start = 478
End = 488
Frequency = 1
[1] -0.08136715 0.02160905 0.15662480 0.11565200 0.03452882 0.03451513
[7] 0.08288710 0.09433470 0.06960341 0.05663045 0.06772454

$se
Time Series:
Start = 478
End = 488
Frequency = 1
[1] 0.2803048 0.3569119 0.3718195 0.3806246 0.4113270 0.4497434 0.4735030
[8] 0.4893106 0.5081946 0.5312326 0.5523451