1
$\begingroup$

I am working on some consumption based asset pricing models. I am modelling consumption growth in several different ways. An obvious one is to model consumption growth as an AR(1) process:

$g_{t+1} = \phi_0 + \phi_1 g_t +\epsilon_{t+1 }$

Where $g_{t+1}$ is consumption growth. What are the implications of having $\phi_1=0$? What about $\phi_1=1$?

In which case is consumption growth iid?

$\endgroup$
1
$\begingroup$

After some careful thought, the answer is trivially simple, actually.

If $\phi_1=0$ then consumption growth is iid. If If $\phi_1=1$ then consumption growth is has a unit root and is not stationary, and so will be the model.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.