Two researchers are asked to estimate an ARMA model for a daily USD/GBP exchange rate return series, denoted . Researcher A uses Schwarz-Bayesian information criteria for determining the appropriate model order and arrives at an ARMA(0,1). Researcher B uses Akaikes information criterion which deems an ARMA(2,0) to be optimal. The estimated models are

A : = 0.38 + 0.101

B : = 0.63 + 0.171 0.092

where is an error term.

You are given the following data for time until day z (i.e. = )

= 0.31, 1 = 0.02, 2 = 0.16 = 0.02, 1 = 0.13, 2 = 0.19

(a) Produce forecasts for the next four days (i.e. for times + 1, + 2, + 3, + 4) from both models.

(b) Suppose that the actual values of the series x on days z+1, z+2, z+3, and z+4 turned out to be 0.62, 0.19, 0.32, 0.72, respectively. Determine which researchers model produced the most accurate forecasts