Autocorrelation

Autocorrelation is a characteristic of data in which the correlation between the values of
the same variables is based on related objects. It violates the assumption of instance
independence, which underlies most of the conventional models. It generally exists in those
types of data-sets in which the data, instead of being randomly selected, is from the same
source.
Presence
The presence of autocorrelation is generally unexpected by the researcher. It occurs mostly
due to dependencies within the data. Its presence is a strong motivation for those
researchers who are interested in relational learning and inference.
Examples
In order to understand autocorrelation, we can discuss some instances that are based upon
cross sectional and time series data. In cross sectional data, if the change in the income of
a person A affects the savings of person B (a person other than person A), then
autocorrelation is present. In the case of time series data, if the observations show intercorrelation, specifically in those cases where the time intervals are small, then these intercorrelations are given the term of autocorrelation.
In time series data, autocorrelation is defined as the delayed correlation of a given series.
Autocorrelation is a delayed correlation by itself, and is delayed by some specific number of
time units. On the other hand, serial autocorrelation is that type which defines the lag
correlation between the two series in time series data.

the “noise” or random disturbance in the relationship between the independent variables and the dependent variable) is the same across all values of the independent variables. The impact of violating the assumption of homoscedasticity is a matter of degree. A simple bivariate example can help to illustrate heteroscedasticity: Imagine we have data on family income and spending on luxury items.Homoscedasticity The assumption of homoscedasticity (literally. we use family income to predict luxury spending (as expected. there is a strong. same variance) is central to linear regression models. Homoscedasticity describes a situation in which the error term (that is. positive association . increasing as heteroscedasticity increases. Heteroscedasticity (the violation of homoscedasticity) is present when the size of the error term diff ers across values of an independent variable. Using bivariate regression.

In this case. Upon examining the residuals we detect a problem – the residuals are very small for low values of family income (families with low incomes don’t spend much on luxury items) while there is great variation in the size of the residuals for wealthier families (some families spend a great deal on luxury items while some are more moderate in their luxury spending).between income and spending). Recall that ordinary least-squares (OLS) regression seeks to minimize residuals and in turn produce the smallest possible standard errors. as it downweights those observations with larger disturbances. weighted least squares regression would be more appropriate. This situation represents heteroscedasticity because the size of the error varies across values of the independent variable. Examining the scatterplot of the residuals against the predicted values of the dependent variable would show the classic coneshaped pattern of heteroscedasticity. biased standard errors lead to incorrect conclusions about . but when heteroscedasticity is present the cases with larger disturbances have more “pull” than other observations. The coeffi cients from OLS regression where heteroscedasticity is present are therefore ineffi cient but remain unbiased. Because the standard error is central to conducting signifi cance tests and calculating confi dence intervals. By defi nition OLS regression gives equal weight to all observations. A more serious problem associated with heteroscedasticity is the fact that the standard errors are biased. The problem that heteroscedasticity presents for regression models is simple.

Many statistical programs provide an option of robust standard error to correct this bias. Overall.the signifi cance of the regression coeffi cients. weighted least squares regression also addresses this concern but requires a number of additional assumptions. Another approach for dealing with heteroscedasticity is to transform the dependent variable using one of the variance stabilizing transformations. the violation of the homoscedasticity assumption must be quite severe in order to present a major problem given the robust nature of OLS regression. while count variables can be transformed using a square root transformation. A logarithmic transformation can be applied to highly skewed variables. Heteroscedasticity .

Outlier in Heteroscedasticity means that the observations that are either small or large with respect to the other observations are present in the sample. Contact Statistics Solutions today for a free 30-minute consultation. simultaneously the savings also increase. the graph would depict something unusual— for example there would be an increase in the income of the individual but the savings of the individual would remain constant. Whenever that assumption is violated. then one can assume that heteroscedasticity has occurred in the data. So. But in the presence of heteroscedasticity. Heteroscedasticity is also caused due to omission of variables from the model. An example can help better explain Heteroscedasticity. Considering the same income saving model. Consider an income saving model in which the income of a person is regarded as the independent variable. if the variable income is . as the value of the income of that individual increases. Statistics Solutions is the country's leader in examining heteroscedasticity and dissertation statistics help. This example also signifies the major difference between heteroscedasticity and homoscedasticity. Heteroscedasticity is mainly due to the presence of outlier in the data.An important assumption assumed by the classical linear regression model is that the error term should be homogeneous in nature. and the savings made by that individual is regarded as the dependent variable for heteroscedasticity.

Due to the presence of heteroscedasticity. Therefore.deleted from the model. the results obtained by the researcher through significant tests would be inaccurate because of the presence of heteroscedasticity. Heteroscedasticity is more common in cross sectional types of data than in time series types of data. . If the process of ordinary least squares (OLS) is performed by taking into account heteroscedasticity explicitly. then it would be difficult for the researcher to establish the process of the confidence intervals and the tests of hypotheses. then the researcher would not be able to interpret anything from the model. the variance that is obtained by the researcher should be of lesser value than the value of the variance of the best linear unbiased estimator (BLUE).

the confidence intervals of the coefficients tend to become very wide and the statistics tend to be very small. Multicollinearity can also result from the repetition of the same kind of  variable. These problems are as follows:  The partial regression coefficient due to multicollinearity may not be  estimated precisely. The standard errors are likely to be high. . Multicollinearity results in a change in the signs as well as in the  magnitudes of the partial regression coefficients from one sample to another sample. It becomes difficult to reject the null hypothesis of any study when multicollinearity is present in the data under study. In the presence of high multicollinearity. Multicollinearity makes it tedious to assess the relative importance of the independent variables in explaining the variation caused by the dependent variable. Multicollinearity can result in several problems. There are certain reasons why multicollinearity occurs:  It is caused by an inaccurate use of dummy variables. and if present in the data the statistical inferences made about the data may not be reliable.  It is caused by the inclusion of a variable which is computed from other  variables in the data set. Generally occurs when the variables are highly correlated to each other.Multicollinearity Multicollinearity is a state of very high intercorrelations or inter-associations among the independent variables. It is therefore a type of disturbance in the data.

asp#ixzz49ix6Qlo4 Follow us: Investopedia on Facebook . In order to calculate a chi-square goodness-of-fit. Goodness-of-fit tests are often used in business decision making. choose a significance level (such as α = 0. it is necessary to first state the null hypothesis and the alternative hypothesis.5) and determine the critical value.Goodness-Of-Fit DEFINITION of 'Goodness-Of-Fit' Used in statistics and statistical modelling to compare an anticipated frequency to an actual frequency. Read more: Goodness-Of-Fit Definition | Investopedia http://www.com/terms/g/goodness-of-fit.investopedia.

Next Up 1.com Sum of Squares DEFINITION of 'Sum of Squares' A statistical technique used in regression analysis. In a regression analysis.http://www. the goal is to determine how well a data series can be fitted to a function which might help to explain how the data series was generated. 2.investopedia. The line of best fit will minimize this value. The sum of squares is a mathematical approach to determining the dispersion of data points. 3.asp? o=40186&l=dir&qsrc=999&qo=investopediaSiteSearch&ap=investopedia.com/terms/g/goodness-of-fit. The sum of squares is used as a mathematical way to find the function which best fits (varies least) from the data. In order to determine the sum of squares the distance between each data point and the line of best fit is squared and then all of the squares are summed up. LEAST SQUARES METHOD HEDONIC REGRESSION LINE OF BEST FIT NONLINEARITY 5. 4. BREAKING DOWN 'Sum Of Squares' .

it is possible to draw a function which statistically provides the best fit for the data.investopedia.asp? o=40186&l=dir&qsrc=1&qo=serpSearchTopBox&ap=investopedia.com Least Squares DEFINITION of 'Least Squares' A statistical method used to determine a line of best fit by minimizing the sum of squares created by a mathematical function. Least squares refers to the fact that the regression function minimizes the sum of the squares of the variance from the actual data points. The least squares approach limits the distance between a function and the data points that .investopedia.There are two methods of regression analysis which use the sum of squares: the linear least squares method and the non-linear least squares method.asp#ixzz49iwSLjTm http://www. In this way.com/terms/s/sum-of-squares. A regression function can either be linear (a straight line) or non-linear (a curving line). A "square" is determined by squaring the distance between a data point and the regression line.com/terms/s/sum-of-squares. Read more: Sum Of Squares Definition | Investopedia http://www.

often in nonlinear regression modeling in which a curve is fit into a set of data.investopedia.com/terms/l/least-squares. BREAKING DOWN 'Least Squares' The least squares approach is a popular method for determining regression equations.com . 2. Instead of trying to solve an equation exactly. Modeling methods that are often used when fitting a function to a curve include the straight line method.asp? o=40186&l=dir&qsrc=1&qo=serpSearchTopBox&ap=investopedia. logarithmic method and Gaussian method. It is used in regression analysis.com/terms/l/least-squares. Next Up 1. 3. 4.investopedia. mathematicians use the least squares to make a close approximation (referred to as a maximumlikelihood estimate). polynomial method. SUM OF SQUARES LEAST SQUARES METHOD LINE OF BEST FIT HEDONIC REGRESSION 5.asp#ixzz49iwszOiT Follow us: Investopedia on Facebook http://www.a function is trying to explain. Read more: Least Squares Definition | Investopedia http://www.