Explanation:
The mean-reverting level is calculated using the intercept of an AR(1) model divided by 1 minus the AR(1) parameter estimate, which in this case is $0.006 / (1 - 0.7) = 0.02$.
(Book 2, Module 21.2, LO 21.g)
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Question 94
A quantitative analyst is evaluating multiple first-order autoregressive (AR) models to determine current and previous relationships for industry activity. She realizes activity moves up and down but is more interested in its usual behavior (e.g., long-run mean-reverting level). When using an AR(1) model with intercept equal to 0.006 and the first-order lagged coefficient equal to 0.7, the analyst should calculate a mean-reverting level closest to which of the following?
A
0.01.
B
0.02.
C
0.03.
D
0.04.
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