Question: Simulate the model pt = 14.3 x 0.45 + 0.55pt1 + t Assume that t is a nor-mally distributed random variable t N(0, 2)

Simulate the model pt = 14.3 x 0.45 + 0.55pt–1 + εt Assume that εt is a nor-mally distributed random variable εt → N(0, σ2) and consider different values for the variance σ2 = 0.25, 1, 2. In the three cases, plot the resulting time series of prices and compute its autocorrelation functions. Compare your results with those of Figures 5.2 and 5.3. What is the effect of increasing the variance of the random shock?

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We simulate 1000 observations of the process p t 6 43 0 55 p t 1 t and plot 100 observations Compare Figures 1 2 and 3 with Figures 52 and 53 in the t... View full answer

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