Wooldridge PPT ch12

U t-1 if you multiply the second equation by ρ and

Info iconThis preview shows pages 8–12. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: + u t-1 If you multiply the second equation by ρ , and subtract if from the first you get y t – ρ y t-1 = (1 – ρ ) β + β 1 (x t – ρ x t-1 ) + e t , since e t = u t – ρ u t-1 This quasi-differencing results in a model without serial correlation Fall 2008 under Econometrics Prof. Keunkwan Ryu 9 Feasible GLS Estimation Problem with this method is that we don’t know ρ , so we need to get an estimate first Can just use the estimate obtained from regressing residuals on lagged residuals Depending on how we deal with the first observation, this is either called Cochrane- Orcutt or Prais-Winsten estimation Fall 2008 under Econometrics Prof. Keunkwan Ryu 10 Feasible GLS (continued) Often both Cochrane-Orcutt and Prais- Winsten are implemented iteratively This basic method can be extended to allow for higher order serial correlation, AR( q ) Most statistical packages will automatically allow for estimation of AR models without having to do the quasi-differencing by hand Fall 2008 under Econometrics Prof. Keunkwan Ryu 11 Serial Correlation-Robust Standard Errors What happens if we don’t think the regressors are all strictly exogenous? It’s possible to calculate serial correlation- robust standard errors, along the same lines as heteroskedasticity robust standard errors Idea is that want to scale the OLS standard errors to take into account serial correlation Fall 2008...
View Full Document

{[ snackBarMessage ]}

Page8 / 14

u t-1 If you multiply the second equation by ρ and...

This preview shows document pages 8 - 12. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online