Hey all, am just confused on chapter 12 question 2: i think the formula for under random walk model is k_t-k_(t-1)=mu+e_t using this, i get that in ch12q2, mu should be +0.02, but the solutions imply that it should be -0.02. this makes my answers all wrong, could someone help please? Thanks, Molly
Hi Molly The formula given in 12.2 is k_(t+1) = k_t + mu + e_t which can be rearranged to; k_(t+1) - k_t = mu + e_t This can also be written as: k_t - k_(t-1) = mu + e_(t-1) Using the figure for mu in 12.2, this is: k_t - k_(t-1) = -0.02 + e_(t-1) so mu = -0.02. Essentially the idea is that the difference between k_t and k_(t+1) is given by a fixed amount, mu, plus some random amount, the error term. In 12.2 the index on the error term should actually really be (t+1) rather than (t) to align with the formula presented in the notes (perhaps that is the where the confusion comes from?) but the general idea is that we have mu + random amount. Does this help? Andy
Hi Andy, ah that really does help thank you, i completely missed that it was k_(t+1) but we needed k_(t-1), so im really glad i asked as this was really confusing me!! thanks so much, feel much more comfortable with this now.
