Is my understanding is correct related to the difference between Random Walk & Unit root?
The image is not clear on my head I’m confused!!! Any assitant
Q1: Random walk is a special case of AR1, where b0=0 & b1=1. Therefore, MRL=0/(1-1)=0 undefine. A stock that follows a random walk has no mean reversion level, so you can’t predict which direction it is likely to trend in the future. Is that right???.
Random walk with a drift: b0=1 If a time series is a random walk wit a drift, the next predication for it’s next value is last value.Is that right???. By definition, all random walks have a unit root. when AR1 model b0=1 we call it Unit root. Therefore, MRL=1/(1-1)=0 undefine.
Example: A stock that follows a random walk with unit root, so the predication for it’s next value is last value???
Q2? The first difference for random walk is Yt=change in Xt
Using first difference make the time series coverance stationary with finite MRL=0/1-0=0 = finite??? What the difference between:
MRL=0/(1-1)=0 undefine MRL=0/1-0=0 = finite
What make them differ???
Is the following is right?
Unit root b0=1 it could be random walk when b1=1?? Q4?
Why stock that follows a random walk is defined as having a unit root.