On the textbook's Web site, Table 12-9 contains data on the daily U.S. /EU exchange rate from 2004 to 2008.
a. Create a scatter plot of the rates over time. What pattern do you see?
b. Now take the first differences of the data and create a new plot. Based on this graph, do you think the original series is stationary?
c. Regress the differenced exchange rate on a (one-period) lagged version of the exchange rate as follows:
ΔYt = AYt-1 + ut
Based on this model, do you think the original series is a random walk?
d. Now introduce a constant to the model:
ΔYt = A1 + A2Yt-1 + ut
Do the results here indicate that Y, is a random walk with drift?
e. Lastly, estimate the model using a drift parameter and a trend variable:
ΔYt = A1 + A2t + A3Yt-1 + ut
f. What do all these results indicate about the stationarity of Yt?