# 9.) Serial Correlation Flashcards

Pure Serial Correlation

occurs when Classical Assumption IV, which assume uncorrelated observations of the error term, is violated in a correctly specified equation.

If the expected value of the simple correlation coefficient between any two observations of the error term that are…

not equal to zero.

The most commonly assumed kind of serial correlation is ….

first-order serial correlation, in which the current value of the error term is a function of the previous value of the error term.

The first order autocorrelation coefficient (p) …

measures the functional relationship between the value of an observation of the error term and th evalue of the previous observation of the error term

The magnitude of p indicates…

the strength of the serial correlation in an equation.

A p approaches one in absolute value..

the value of the previous observation of the error term becomes more important in determining the curret value of the stochastic error term, and a high degree of serial correlation exists.

The sighn of p indicates…

the nature of the serial correlation in an equation.

A positive value for p implies…

that the error term tends to have the same sign from one time period to the next.

Positive Serial Correlation indicates…

that the error term tends to have the same sign from one time period to the next.

A negative value of p implies…

that the error term has a tendency to switch signs from negative to positive and back again in consecutive observations

Negative Serial Correlation signals…

that there is some sort of cycle (like a pendulum) behind the drawings of the stochastic disturbances.

By impure serial correlation the authors mean…

serial correlation is caused by a specification error such as an omitted variable or an incorrect functional form.

Pure Serial Correlation is caused by…

the underlying distribution of the error term of the true specification of an equation

Impure Serial Correlation is caused by…

a specification error that often can be corrected.

An omitted variable can cause…

the error term to be serially correlated

The proper remedy for serial correlation depends on …

whether the serial correlation is likely to be pure or impure

the new error term e* will tend to be serially correlated when…

- ) X2 itself is serially correlated (this is quite likely in a time series) and
- ) the size of e is small compared to the size of B2Xbarred2