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November 08, 2005
Serially Correlated Errors - II
Serially correlated error would violate the assumption that the errors are independent of each other.
The Cochrane-Orcutt estimation procedure alternates between estimating rho and estimating beta until the process converges.
The Durbin-Watson statistic is very nearly equal to 2(1-rho), where rho is the correlation between the current and lagged error residual.
A lagged dependent variable can induce dynamics very similar to those created by serially correlated errors. Distinguishing between the models is very difficult in practice.
Posted by bparke at November 8, 2005 10:02 PM