Question

The equation of a random walk model WITHOUT drift is best represented as:

Option A random walk WITH drift. Option C trend-stationary TS process fundamentally different from a unit root DS process. Option D stationary AR1.

A Yₜ = μ + Yₜ₋₁ + εₜ, where μ ≠ 0 is the drift term and εₜ ~ WN(0, σ²)

B Yₜ = Yₜ₋₁ + εₜ, where εₜ ~ WN(0, σ²); the process has no deterministic trend and has a unit root

C Yₜ = α + βt + εₜ, where the trend is deterministic and the process is stationary around it

D Yₜ = ρYₜ₋₁ + εₜ, where |ρ| < 1, making the process mean-reverting and stationary

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