week13-14

week13-14 - ECON346 (Econometrics) Week13-14 Page 1 Serial...

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ECON346 (Econometrics) Week13-14 Page 1 Serial Correlation (autocorrelation) Serial correlation is usually associated with time series data, but can occur in cross- sectional data also, in which case it is called spatial correlation (correlation in space rather than in time). The classical assumption: i j E( )=0 or ( ) 0 if ij E r i j ε ε = If the current observation of the error term is function of the previous observation of the error term (violation of classical assumption): For a time series example (first order serial correlation): 1 t t t u ε ρε - = + Property of ρ (the strength of the serial correlation) 1. 1 1 ρ - < < 2. ρ = 0 means no serial correlation. 3 . As the absolute value of ρ approaches to 1 means a high degree of serial correlation 1. Reason for the serial correlation Pure Serial Correlation: The most economic time series exhibit some cyclical behavior and successive observations are likely to be interdependent or correlated. GNP, employment, money supply price indexes Impure Serial Correlation: caused by specification error like omitted variables or an
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week13-14 - ECON346 (Econometrics) Week13-14 Page 1 Serial...

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