What if there is serial correlation?
If a variable’s serial correlation is measured as zero, there is no correlation, and each of the observations is independent of one another. Conversely, if a variable’s serial correlation skews toward one, the observations are serially correlated, and future observations are affected by past values.
When does differencing induce serial correlation between errors?
If the errors have a stationary AR (p) distribution, say, then the differenced error term would have a more complicated distribution and, notably, would retain serial correlation. Or if the original ϵ are already white noise (An AR (1) with a correlation coefficient of 0 if you like), then differencing induces serial correlation between the errors.
When does correlation occur in a time series?
correlation occurs in time-series studies when the errors associated with a given time period carry over into future time periods. For example, if we are prediciting the growth of stock dividends, an overestimate in one year is likely to lead to overestimates in succeeding years. There are different types of serial correlation.
How are errors in one time period correlated?
first-order serial correlation, errors in one time period are correlated directly with errors in the ensuing time period. (Errors might also be lagged, e.g. if data are collected quarterly, the errors in Fall of one year might be correlated with the errors of Fall in the next year.) With positive serial correlation, errors in one time period are
Are there any corrections for Seri al correlation?
Corrections for Seri al Correlation. Pindyck and Rubinfeld describe various procedures for dealing with serial correlation. These include generalized differencing, the Cochrane-Orcutt Procedure, and the Hildreth-Lu procedure. Related Topics. Stata has a variety of commands and procedures for time series data.