Page 24 of the secret sauce says: For an AR(1) model to be covariance stationary: -b1 must be less than 0 -if b1=0, there is a unit root -The mean reverting level must be defined The first two are throwing me off…I thought if b1=1 then b0/(1-b1) is undefined and therefore unit root. Where have I gone wrong?
They are throwing you off because they are both wrong.
I think you should read “less than 1” and “=1”
'tis what I thought. Thanks guys.