An econometrician, a technical analyst, and a quantitative analyst are invited to a party hosted by Mart N. Gail. The econometrician observes 2 different stocks, and proposes an econometric time series model for each. The technical analyst observes stocks A and B, and proposes a technical trend. The fixed income quant observes 2 bonds, and proposes stochastic behavior for each.

Question 1

The econometrician claims in Stock A there is an AR(1) model, where the coefficient of the lag is less than 1, and the intercept is greater than 0. You know for a fact that this stock price is a martingale. Can the econometrician be correct? Use a formula to justify your reasoning.