Question: Consider the following AR(2) processes and : = 1.5 1 0.5 2 + = 0.7 1 0.1 2 + where and are independent white noise

Consider the following AR(2) processesand:

= 1.51 0.52+

= 0.71 0.12+

whereandare independent white noise error terms with mean 0 and variances2and2respectively.

  1. Write the characteristic equations forandand use them to show whether these processes are stationary or non-stationary.
  2. Based on your answer to (1), how would you proceed if you wanted to run a regression involving bothand? How would you interpret this regression?

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