1. Classify each of the following time series models in terms of the random variable rt: a. rt = a +

1. Classify each of the following time series models in terms of the random variable rt: a. rt = a + ?1rt-1 + ?2rt-2 + et b. rt = ?µ + (1 – ?)rt-1 + et c. rt = ?1rt-1 + ?2rt-2 + et + ? 1et-1 d. rt = a + et 2. You are given the following time series model. What is the long-term expected value of rt? rt = 0.02 + 0.8rt-1 + et c11.indd 234 11/14/13 5:03 PM Time Series Models 235 3. Assume that a credit spread evolves according to the following time series equation: rt = 0.01 + 0.30rt-1 – 0.20rt-2 + et Further, assume rt was 2% during the most recent period, and 4% during the period before that. What is the expected value of rt in the next period? The period after that?