Explanation:
C is correct. Both macroeconomic variables clearly exhibit contrasting ACF and PACF:
For an ACF which decays towards zero, 0 < φ < 1, which matches the pattern observed for MEV1. For an ACF which oscillates between positive and negative values, φ < 0, which matches the pattern observed for MEV2.
A, B and D are incorrect. They can be eliminated by recognizing the differences explained above.
Learning Objective: Define and describe the properties of autoregressive moving average (ARMA) processes. Describe sample autocorrelation and partial autocorrelation.
Reference: Global Association of Risk Professionals. Quantitative Analysis. New York, NY: Pearson, 2023. Chapter 10. Stationary Time Series [QA-10]
Based on the graphs above, and supposing that the analyst chose to estimate an AR(1) model, what are the most likely values of the AR parameter (φ) in each case?
A
φ < 0 for MEV1 and φ < 0 for MEV2
B
φ < 0 for MEV1 and 0 < φ < 1 for MEV2
C
0 < φ < 1 for MEV1 and φ < 0 for MEV2
D
0 < φ < 1 for MEV1 and 0 < φ < 1 for MEV2
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