(a) Consider the following AR(1) model yt = yt1 + ut (12.31) Design a simulation experiment (with...

(a) Consider the following AR(1) model yt = φyt−1 + ut (12.31)

Design a simulation experiment (with code for EViews) to determine the effect of increasing the value of φ from 0 to 1 on the distribution of the t-ratios.

(b) Consider again the AR(1) model of (12.31). As stated in chapter 4, the explanatory variables in a regression model are assumed to be non-stochastic, and yet yt−1 is stochastic. The result is that the estimator for φ will be biased in small samples. Design a simulation experiment to investigate the effect of the value of φ and the sample size on the extent of the bias.

AppendixLO1