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Extreme Events – Specimen Question A.4.1

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You are an investor trying to understand better the behaviour of Index B in A.2.1. You think that it is likely to be best modelled by an AR(1) autoregressive model along the lines of  with random independent identically distributed normal error terms .

 

(a)    Estimate the value of c 16 times, the first time assuming that you only have access to the first 5 observations, the next time you only have access to the first 6 observations, etc.

 

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(b)   Do these evolving estimates of   appear to be stable? How would you test such an assertion statistically?

 

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