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(a) Consider the following non-stationary models: (1) YFa + Bit & (2) Identify the above process and discuss how to solve the issue of non-stationarity
(a) Consider the following non-stationary models: (1) YFa + Bit & (2) Identify the above process and discuss how to solve the issue of non-stationarity for the above models. demonstrate how stationarity can be induced. (10 marks) (b) The following transformation did not manage to remove non-stationarity in model which is assumed to have an I(2) process: ZI = y1 - yi-1 How can stationarity be induced? Clearly demonstrate the process. (6 marks) (c) Suppose you run an ADF test on b) after attempting to remove the non-stationary. The test statistic for the ADF is -2.373. At the 1% level of significance, is there stationarity? Discuss the implications of the result. Clearly state the null and alternate hypothesis and conclusion. (7 marks) Significance level 10% 5% 1% C.V. for constant -2.57 -2.86 -3.43 but no trend C.V. for constant -3.12 -3.41 -3.96 and trend (d) Briefly discuss ONE (1) difference between Phillips-Perron test and Dickey Fuller test? (2 marks)
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