1. In many applications, differencing economic and financial variables make them station- ary. Should we take first diff

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1 In Many Applications Differencing Economic And Financial Variables Make Them Station Ary Should We Take First Diff 1 (90.97 KiB) Viewed 18 times

1. In many applications, differencing economic and financial variables make them station- ary. Should we take first differences of all variables to ensure stationarity? To answer this question, we consider what would happen if a white noise process Xt = Et is inappropriately first-differenced. Define the process AXt = Xt - Xt-1. t 1.1. Compare the variances of X₁ and AX₁. Show and justify your calculations. Comment on your findings. [15%] 1.2. Compare the autocorrelation functions of Xt and AXt. Show and justify your calculations. Comment on your findings. [20%] 1.3. Is the process AX, stationary? Is it invertible? Justify your answers. [15%]