Consider the model yt = "tyt􀀀1 where _t is white noise (0; _2) (a) Show that the conditional variance of yt given yt􀀀1 is _2y2 t􀀀1 (b) Verify that under the assumption of second order stationarity...

Consider the model yt = "tyt􀀀1 where _t is white noise (0; _2)

(a) Show that the conditional variance of yt given yt􀀀1 is _2y2

t􀀀1

(b) Verify that under the assumption of second order stationarity if _2 6=

1 then the variance of yt is zero or in_nite.

(c) Write this model as a Volterra expansion. What assumption on y0

seems reasonable?

6.3 Explain briey the following concepts.

(a) Return of a _nancial instrument.

(b) Conditional heteroskedasticity.

(c) Non linear process.

(d) Best lineal predictor.