1.Download the monthly Case-Shiller house price index for Los Angeles from the St. Louis Fed (FRED II). Choose the version that is not seasonally adjusted, and get all data, from about 1987 through the last available data point.

2.Compute the monthly appreciation r _tt+1 = (H _t+1 - H _t)/ H _t. Extra points if you can show that the resulting time series is stationary.

3.Model the change in appreciation as an Orenstein-Uhlenbeck process (discretized version)

r_t+1 = r _tt+1 - r _t = ( - r _t) t + t^1/2

where is a normally distributed variable with mean 0 and variance 1, and , , and are constants.

Hints:

a.in excel, by adding in the Analysis Tool pack from File>Options>Add-Ins. Use OLS regression, with y= r _ttt+1 - r _t and x = r _t t, and identify the unknown parameters above (, and ) from your linear regression result.

b.To compute , ask the regression to give you the residuals, find their standard deviation, and then divide the answer by t^1/2

c.Since t = (1/12) years (monthly), your parameters will be annual numbers.