WHAT IS

AUTOCORRELATION
IN REGRESSION ANALYSIS?

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 MEANING

Autocorrelation (or Serial

Correlation) is where adjacent
observations are correlated, i.e.
previous value impacts the next
deal. This leads to problems in
statistical analysis like Regression,
Time Series etc., as the
assumption of independence of
values is violated.

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Regression analysis is one of the
most common forecasting methods,
one of the most critical assumptions
while leveraging regression analysis
is that the error terms are
independent or random, i.e. they are
not correlated. However, these error
terms tend to be correlated in most
business scenarios. This correlation
of error terms of a regression
forecasting model is called
Autocorrelation or Serial Correlation.

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There are two common scenarios
pertaining to autocorrelation i.e.
Positive Autocorrelation &
Negative Autocorrelation.

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Positive autocorrelation exists
when positive errors are
associated with positive errors of
comparable magnitude & negative
errors are associated with
negative errors of comparable
magnitude.

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Negative autocorrelation exists
when the positive errors are
associated with negative errors of
comparable magnitude & negative
errors are associated with
positive errors of similar
magnitude.

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 Possible problems that can
arise due to autocorrelation:

The estimates of the

regression coefficients will
become inefficient as they will
no longer have the minimum
variance property.
The mean square error value
will underestimate the
variance of the error terms.

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The true standard deviation of
the estimated regression
coefficient will also be
underestimated.
The confidence intervals & the
tests using the t & F
distribution will no longer be
strictly applicable.

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