Financial Risk Manager Part 1

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Which of the following is an autoregressive model with order 2?

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NNikitesh

Last updated: February 2, 2026 at 10:22

$x_t = b_0 + b_1x_{t-1} + \varepsilon_t$

$x_t = b_0 + b_1x_{t-1} + b_2x_{t-2} + \varepsilon_t$

$x_t = b_0 + b_1x_{t-1} + b_2x_{t-2} + b_3x_{t-3} + \varepsilon_t$

$x_t = b_0 + b_1 + \varepsilon_t$

Explanation:

The correct answer is B because an autoregressive model of order 2 (AR(2)) includes two lagged values of the dependent variable. Model B contains $x_{t-1}$ and $x_{t-2}$ , which makes it an AR(2) process. Model A is AR(1), Model C is AR(3), and Model D is not a proper autoregressive model as it lacks lagged dependent variables.

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