Leila Corporation used the following regression model to determine if the forecasts over the last ten years were biased: S_t = a₀ + a₁F_t _- ₁ + $\mu$ _t,
Where S_t is the spot rate of the yen in year t and F_t _- ₁ is the forward rate of the yen in year t-1. Regression results reveal coefficients of a₀ = 0 and a₁ = .30. Thus, Leila Corporation has reason to believe that its past forecasts have ____ the realized spot rate.

Question

Leila Corporation used the following regression model to determine if the forecasts over the last ten years were biased: S_t = a₀ + a₁F_t _- ₁ +

\mu

_t,
Where S_t is the spot rate of the yen in year t and F_t _- ₁ is the forward rate of the yen in year t-1. Regression results reveal coefficients of a₀ = 0 and a₁ = .30. Thus, Leila Corporation has reason to believe that its past forecasts have ____ the realized spot rate.

Quizplus · Accepted Answer

Since the coefficient of a₁ is positive, it means that the forecasts have underestimated the realized spot rate. Therefore, the answer is A, overestimated, incorrectly reflects the information given in the problem.

Leila Corporation Used the Following Regression Model to Determine If μ\muμ

Leila Corporation Used the Following Regression Model to Determine If $\mu$