easy · FRM Part 1 Quantitative Analysis
A risk manager is testing for a unit root in a time series of credit spreads to determine if the series is stationary.
If the series is found to be I(1), what is the most appropriate action before using the data in a linear regression model?
- Log-transform the data to stabilize the variance.
- Take the first difference of the data to achieve stationarity.
- Increase the sample size to improve the power of the unit root test.
- Add a time trend variable to the regression to account for the drift.
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