Hi there On page 44 in the "Stochastic models of security prices" chapter (chapter 8 in 2009 ActEd notes, chapter 9 in 2010 ActEd notes), I'm trying to derive the 1st and 5th components in the matrix U(t). The 1st component begins lnD(t) -lnQ(t) - .... The 5th component reads D(t) - QMU. I understand that when you multiply out the RHS of the equation U(t+1)=A1*U(t)+L.Z(t+1), you get the equations defining the 1st and 5th components respectively. Moreover, each of these component equations are markovian. However, what I don't understand is how these two equations (that define the 1st and 5th component respectively) are derived from the updating equations used in the VARMA form presentation? I thought that perhaps it is derived from the VARMA form presentation equation for K(t). This is because the revised updating equation for K(t) (on page 39 of the notes), is not markovian. But could you please help me in deriving the two component equations? Thank you ever so much. Regards
Not wishing to avoid the question but it seems that you are concentrating on the really fine details of some algebra here that has probably not been touched for years. VARMA form - make sure that you understand the solution to 109 S04 Q7 After that, concentrate on past paper questions. If you're still worried about this bit of the course after doing all 11 CT8 past papers then get back to me Good luck! John
