1、10. Autocorrelation,Autocorrelation and serial correlation,Economics and Management School WuHan University,1,Why does serial correlation occur? (1)Inertia (2)Specification bias:Exclued variable case (3)Specification bias:Incorrect functional form (4)Cobweb phenomenon (Supply function) (5)Lags (6)“M

2、anipulation”of data (7)Data transformation (8)Nonstationarity (time series data),10.1 OLS Estimation in the Presence of Autocorrelation,Where is the Coefficient of Autocovariance and where is the stochastic disturbance term such that it satisfied the standard OLS assumptions.,Markov First-order auto

3、regressive scheme/First-order autoregressive scheme: AR(1),Economics and Management School WuHan University,2,Graphic Method The Runs Test Durbin-Watson d Test The Breusch-Godfrey (BG) Test,10.2 Detecting Autocorrelation,Economics and Management School WuHan University,3,Try to find out if the autoc

4、orrelation is pure autocorrelation and not the result of mis-specification of the model. If it is pure autocorrelation, one can use appropriate transformation of the original model so that in the transformed model we do not have the problem of (pure) autocorrelation. (Generalized least-square (GLS) Method) In large samples, we can use the Newey-West method to obtain standard errors of OLS estimators that are correlated for autocorrelation. In some situations we can continue to use the OLS method.,10.3 Remedial Measur