CFAI Mock AM Quants Q9

This is stupid, but I don’t really understand the CFAI answer. If you do the first differencing, than y(t) = x(t) - x(t-1) and the model becomes y(t) = b0 + b1 y(t-1) + e So why isn’t the answer C? Anyone has 2 seconds to explain quickly ? Thanks! J.

No need to answer, I found it! My bad, I was reading too quickly. Thanks anyway. J.

Really hoping for just one quant vignette. I’m cool with most of it, but when you get into ARCH/first differencing, I just can’t get a grip on it.

Because that’s how you use Dickey Fuller to check unit root: The Dickey-Fuller test estimates the equation (xt – xt-1) = b0 + (b1 - 1) * xt-1 + et and tests if H0: (b1 – 1) = 0. Using a modified t-test, if it is found that (b1–1) is not significantly different from zero, then it is concluded that b1 must be equal to 1.0 and the series has a unit root. here g1 is equivalent to (b1-1) The equation you mentioned still applies but to use D/F method you have to formulate this equation

I hope they don’t ask too many tricky questions on Time-Series.