Answer-first summary for fast verification
Answer: It does not incorporate observable shocks, so the solution is to use an autoregressive representation
The main challenge of a moving average representation of an MA(1) process is the fact that it attempts to estimate a variable in terms of random, unobservable white shocks. The only way to make it more useful for estimation is to invert it into an autoregressive representation because an observable item can now be used.
Author: Nikitesh Somanthe
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Which of the following statements best explains the main setback of the moving average representation of a first-order moving average process, MA(1)?
A
It does not incorporate observable shocks, so the solution is to use an autoregressive representation
B
It does not show evidence of autocorrelation cutoff
C
It only incorporates observable shocks, so the solution is to use an autoregressive representation
D
The process is highly complicated and can only be carried out using a computer program