May be my lack of understanding but... why should we think to difference the equation to solve for a and sigma?
Hi Edward First thing to note is this is a hard question as noted in the Examiners' Report. We would think to difference because in part (i) of the question we establish that the process is not stationary. Differencing is one of the main tools available to use to create a stationary time series from a non-stationary one, and to find the parameters of a series we need it to be stationary. In this case it is easy to see that differencing once yields a stationary process - the hard part is recognising that this will work in the first place. Hope that helps Dave
