Essay Exchange Rate and Applied the Augmented Dickey Fuller Test – Science Assignment Help

Assignment Task:

TASK:

Question 1 [60 marks] a. Consider the following autoregressive process:  Is this process covariance stationary? [5 marks] b. Consider the process:

2) Can this ARMA(1,1) process be expressed as an AR process? If so, give the first four terms of the equivalent AR process. [15 marks]

c. Suppose that we had data on the CLP:GBP exchange rate and applied the Augmented Dickey Fuller test. When testing for a unit root against the alternative of a constant mean we find that we cannot reject the null at the 10% level of significance. When testing for a unit root against the alternative of a deterministic time trend we find that we can reject the null at the 5% level of significance but not at the 1% level of significance. What would be your conclusion as to the stationarity of the exchange rate series? What implications would this have for the further analysis of the series? [15 marks]

d. Suppose that we have the following estimated distributed lag model: ??? = −0.01 + 0.3?? + 0.2??−1 (0.002) (0.1) (0.08) where y is the weekly change in the three-month interbank lending rate in Canada and x is the weekly change in the three-month interbank lending rate in the USA, both measured in percentage points, and numbers in ( ) are the standard errors. Suppose that both y and x are covariance-stationary.

i) Under what conditions would OLS estimation of this model be consistent? Do you think these conditions would be satisfied? [5 marks]

ii) If the change in the USA three-month interbank lending rate were to increase by one point, what would be the expected effect on the change in the Canadian three-month interbank lending rate? [5 marks] iii) Outline appropriate tests for serial correlation and heteroskedasticity with respect to the residuals of this regression.