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Explanation:
A major technological breakthrough represents long-lived economic information because its impact on the economy (e.g., productivity, investment, restructuring) will persist over an extended period. In mean-reverting interest rate models, the mean-reversion parameter determines the speed at which the interest rate is pulled back to its long-term average. Long-lived economic shocks cause prolonged deviations from the long-term mean, meaning the reversion process is slow. Therefore, such information is associated with a low mean-reversion parameter.
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Q.4017 The U.S. department of Transport has just announced an unexpected technological breakthrough that will have a major bearing on the development of self-driving autonomous vehicles. What is the most likely anticipated impact on a mean-reverting model of interest rates?
A
The economic information is long-lived with a low mean-reversion parameter.
B
The economic information is short-lived with a low mean-reversion parameter.
C
The economic information is long-lived with a high mean-reversion parameter.
D
The economic information is not affected by a high mean-reversion parameter.