Model the change in appreciation as an Orenstein-Uhlenbeck process (discretized version) rt+1 = r tt+1 r t = ( r t) t + t1/2 where is a normally distributed variable with mean 0 and variance 1. That is, find the parameters , and for your data set. Hints: a. Do this 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, and identify the unknown parameters above (, and ) from your linear regression result. Note that there is very likely serial autocorrelation. This has implications for BLUE.

b. To compute , ask the regression to give you the residuals, find their standard deviation, and then divide the answer by t1/2

c. It is probably best to use t = 1 month; i.e., use monthly appreciation, your parameters estimates will be monthly.

d. Note: This model is quite simplistic and not suited (in isolation) to a real- world analysis. However, the point of this project is to illustrate the techniques and financial principles involved.