WELCOME TO OUR PRESENTATION PROGRAM

SUBMITTED TO
FAHAD ZEYA
ASSISTANT PROFESSOR
DEPARTMENT OF FINANCE & BANKING
COMILLA UNIVERSITY
RAKESH CHOWDHURY
ID: 22217018
AUTOCORRELATION REFERS TO THE DEGREE OF CORRELATION OF SAME VARIABLES
BETWEEN TWO SUCCESSIVE TIME PERIOD.

CORRELATION BETWEEN MEMBERS OF OBSERVATIONS ORDERED IN TIME.

AUTOCORRELATION ANALYSIS MEASURES THE RELATIONSHIP OF THE OBSERVATIONS

BETWEEN THE DIFFERENT POINTS IN TIME.

EXAMPLE:

IF SUPPLY OF THIS YEAR IS EFFECTED BY THE PREVIOUS YEAR PRICE.

NATURE OF AUTOCORRELATION
• One of the assumption of the classical linear regression is that the covariance
between ui, the error term for observation i, and uj the error term for observation
j, is zero.
• Autocorrelation is associated with time series data
• E(uiuj)=0 I not equal to j.
• U and v are two different time series
• Autocorrelation can positive or negative.
EXAMPLE OF AUTOCORRELATION:
SAJIA AFRIN SINTHIA

ID:22217040
THE COBWEB PHENOMENON

NICHOLAS KALDOR ANALYZED THE MODEL IN 1934.

THE COBWEB MODEL IS GENERALLY BASED ON A TIME LAG

BETWEEN SUPPLY AND DEMAND DECISIONS.

COBWEB PHENOMENON, SUPPLY REACTS TO PRICE WITH A

LAG OF ONE TIME PERIOD.

PLANTING OF CROPS ARE INFLUENCED BY LAST YEAR’S

PRICES.

SUPPLYT = B1 + B2PT-1 + UT
DATA MANIPULATION:

DATA MANIPULATION IS A PROCESS OR COLLECTION OF

STRATEGIES FOR CHANGING RAW DATA.

DATA SMOOTHNESS MEANS GETTING DATA BEING

MANIPULATED AND GETTING THE BETTER FORM OF
DATA.

ORIGINAL MODEL, YT = Β1 + Β2XT + UT

MODEL AT LAG PERIOD, YT-1 = Β1 + Β2XT-1 + UT-1

CHANGES MODEL, ΔYT = Β2ΔXT + UT

ISTIAQUE HOSSAIN
ID: 22217025
CONSEQUENCES OF AUTOCORRELATION

• The OLS estimators are still linear and unbiased.

• They are no longer BLUE
• Estimated variance of OLS estimators are biased.
• The t test and F tests are not reliable.
• Error variance are also biased.
• Computation of R-square may be an unreliable major of true R-square.
• Variances and standard errors of forecast may be inefficient
AFRIN SULTANA
ID:22217051
TESTING AUTOCORRELATION BY GRAPHICAL
METHOD
10.3 Residual from regression
TISHA SAHA
ID: 22217027
 THE DURBIN-WATSON D TEST

Test Statistic
Purpose
The Durbin-Watson test statistic, D, is
calculated as:
Determine if there is any
significant autocorrelation in the
residuals from a regression model

Where:
et = Residual at time t
T = Total number of observations
 INTERPRETATION
The value of D can fall between 0 and 4

If d≈2, it indicates no autocorrelation.

If d<2, it suggests positive autocorrelation.

If d>2, it suggests negative autocorrelation. Limitations

The Durbin-Watson test is specifically
designed for detecting first-order
autocorrelation and may not be as effective
for higher order autocorrelations
 EXAMPLE
Let's say I've run a simple linear
regression and obtained the
following residuals for five time
period Time (t) Residual (et)
1 2
2 4
3 3
We'll calculate the Durbin- 4 1
Watson statistic using the 5 3
given formula.
Step 1: Calculate the differences
Step 4: Square each residual and sum them
between consecutive residuals
e2−e1=4−2=2 22+42+32+12+32=4+16+9+1+9=39
e3−e2=3−4=−1
Step 5: Compute the d statistic =13/39=0.33
e4− e3 =1−3=−2
e5− e4 =3−1=2 With a d value of 0.33, this would indicate positive
autocorrelation among the residuals.
Step 2: Square each difference
22=4 Time (t) Residual (et)
(-1)2=1 1 2
(-2)2=4
22=4 2 4
3 3
Step 3: Sum the squared differences
4+1+4+4=13
4 1
5 3
DALOWER HOSSAIN
ID: 22217007
REMEDIAL MEASURES

WHEN AUTOCORRELATED ERROR TERMS ARE FOUND TO BE PRESENT, THEN

ONE OF THE FIRST REMEDIAL MEASURES SHOULD BE TO INVESTIGATE THE
OMISSION OF A KEY PREDICTOR VARIABLE. IF SUCH A PREDICTOR DOES NOT
AID IN REDUCING/ELIMINATING AUTOCORRELATION OF THE ERROR TERMS,
THEN CERTAIN TRANSFORMATIONS ON THE VARIABLES CAN BE
PERFORMED. WE DISCUSS THREE TRANSFORMATIONS WHICH ARE
DESIGNED FOR AR(1) ERRORS. METHODS FOR DEALING WITH ERRORS FROM
AN AR(K) PROCESS DO EXIST IN THE LITERATURE, BUT ARE MUCH MORE
TECHNICAL IN NATURE.
Remedial measure suggested by the patients to improve the hospital services.
REMEDIAL MEASURES OF AUTOCORRELATION

 Used different approach.

 Reformulate the regression model and re- estimate the regression coefficient
 Adding/ removing a variable or changing functional form
 Cochrane Orcutt method
 Autoregressive method
COCHRANE ORCUTT : ADJUST A LINEAR MODEL FOR SERIAL CORRELATION
IN THE ERROR TERM

AUTO REGRESSIVE MODEL: PREDICT FUTURE VALUE BASED ON PAST

VALUE
NADIA SULTANA
ID:22217048
HOW TO ESTIMATE P?

THERE IS NO UNIQUE METHOD OF ESTIMATING P,

RATHER THERE ARE SEVERAL APPROACHES, SOME
OF WHICH WE PRESENT NOW.
1.P=1 :THE FIRST DIFFERENCE METHOD
2.P ESTIMATED FROM DURBIN-WATSON D STATISTIC
METHOD
3.P ESTIMATED FROM OLS RESIDUALS
4.OTHERS METHOD OF ESTIMATING P
1.P=1 :THE FIRST DIFFERENCE METHOD
SINCE, P LIES BETWEEN THE RANGE -1 TO +1,FROM THIS , LITERALLY
HUNDREDS VALUES OF P CAN BE CHOSEN, IF WE ASSUME THAT P= 1; THAT
IS, THE ERROR TERMS ARE PERFECTLY POSITIVELY AUTOCORRELATED,
WHICH MAY BE TRUE OF SOME ECONOMIC TIME SERIES. IF THIS
ASSUMPTION IS ACCEPTABLE, THE GENERALISED DIFFERENCE EQUATION
REDUCES TO THE FIRST DIFFERENCE EQUATION AS:
YT-YT-1=B2(XT-XT-1)+UT
WHERE THE MODEL HAS NO INTERCEPT. HENCE, TO ESTIMATE EQUATION,
WE HAVE TO USE THE REGRESSION THROUGH THE ORIGIN ROUTINE IN
THE COMPUTER PACKAGE. NATURALLY, WE WILL NOT BE ABLE TO
ESTIMATE THE INTERCEPT TERM IN THIS CASE DIRECTLY.
2.DURBIN-WATSON D STATISTIC METHOD
APPROXIMATE RELATIONSHIP BETWEEN THE D STATISTIC AND P:
1. D=2(1-P)
2. P=1-D/2
ONCE P IS ESTIMATED FROM D AS SHOWN IN EQUATION 2,WE CAN
THEN USE IT TO RUN THE GENERALISED DIFFERENCE EQUATION
FOR WAGES PRODUCTIVITY FOR EXAMPLE, IF
D=0.2136.THEREFORE,
P=1-0.2136/2=0.8932
THIS P VALUE IS OBVIOUSLY DIFFERENT FROM P=1 ASSUMED FOR
FIRST DIFFERENCE TRANSFORMATION. THIS METHOD OF
TRANSFORMATION IS EASY TO USE AND GENERALLY GIVES GOOD
ESTIMATES OF P IF THE SAMPLE SIZE IS REASONABLY LARGE
ADIBA AFROZE
ID:22217020
A LARGE SAMPLE METHOD
OF CORRECTING OLS
STANDARD ERRORS: THE
NEWEY-WEST (NW) METHOD
 THE NEWEY-WEST(NW) METHOD

• If a researcher is using a large sample in his data i.e. the sample size is large and he doesn’t want to
add any more variables as he thinks he has enough variables.
• So here is one more test NW test, which is popularly known as HAC test(Heteroscedasticity &
Autocorrelation Consistent)test.
• If a researcher performs the regression by selecting the HAC test. Due to autocorrelation, any
changes in probe value & standard error HAC test adjust them after selecting the HAC test.
• Now the regression comes to him, It is reliable. It can be significant and can be interpreted.
• It is interesting to note that HAC doesn’t change the values of OLS estimator; it only corrects their
standard errors.
NOW WE WILL USE DATA ON CORPORATE DIVIDENDS PAID & CORPORATE
PROFITS(CP)

lDividend=B1+B2lCP+B3Time+ut
Where
l denotes the natural logarithm
B2= elasticity of dividends with respect to profits

B3= percent growth in dividends over time.

Ut= Error term

 USING EVIEWS 6, WE OBTAINED THE FOLLOWING RESULTS:

These results look "Good". All the coefficients are individually highly significant.(the p values are
practically zero),and the R square is very high. The elasticity of dividends with respect to
corporate profits is about 0.42 and the dividends have been increasing at quarterly rate of about
1.26 percent.
The only fly in the ointment is the low value of the Durbin-Watson statistic, which suggests a high
degree of positive autocorrelation in the residuals. Therefore, we cannot trust these results
without taking care of the autocorrelation problem.