Question

Explain the problem of Autocorrelation. What are the consequences of Autocorrelation? What are the corrections to...

Explain the problem of Autocorrelation. What are the consequences of Autocorrelation? What are the corrections to Autocorrelation?

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Answer #1

Autocorrelation is a problem in time-series regression. It refers to a problem in data collected repeatedly over a period of time. The data iscorrelated with itself. As a consequence of autocorrelation, the error term observations follow a pattern. From such patterns, we can infer that something is wrong.

Corrections to Autocorrelation:

Method 1: The model specification is left as it is, but the confidence intervals are expanded around the regression coefficients to account for the violation of the model assumption of non-autocorrelated errors.

Method 2: The model specification is changed to obtain non-autocorrelated errors.

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