Economics Homework Help

Consider the following time series model:

xt = ρxt−1 + εt, (4)

where εt is an iid and can take on value -0.5 with probability 0.5 and +0.5 with probability 0.5.

1. Under what condition is this process covariance stationary? Show that it is not covariance stationary if ρ = 2.
2. Let us assume that ρ = 0.75. By flipping a coin please generate 15 datapoints (or more if you want) for this time series process, assuming head = −0.5 and tail = 0.5. Report it and plot up the sample path from this experiment with xt as a function of time.