Serial Correlation a . A Durbin Watson statistic could indicate either the presence of quot;purequot; or quot;impurequot; autocorrelation:…

1. Serial Correlation

a. A Durbin Watson statistic could indicate either the presence of “pure” or “impure” autocorrelation:

i. Describe a specific souce of “pure” and “impure” serial correlation.

ii. Which is more detrimental to a model? Why ?

b. Given a model “infected” with first-order autocorrelation:

i. Why are the t-statistics likely to be misleading?

ii. What danger does this pose to the researcher?

c. Given Yt= B0Xt +et and Yt-1 = B0+B1Xt-1+et-1,mathematically derive the Cochrane-Orcutt generalized difference equation whose parameters will be purged of first-order autocorrelation.

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