Explanation:
A major technological breakthrough, such as the development of self-driving autonomous vehicles, represents a structural shift or long-term shock to the economy. In the context of mean-reverting interest rate models, such long-lived economic information leads to a low mean-reversion parameter. This implies that the interest rates adjust slowly over a longer period to the new equilibrium, rather than snapping back quickly as they would with short-lived shocks (which are characterized by high mean-reversion parameters).
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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.
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