The data is correlated with itself. I hope this gives you a different perspective and a more complete rationale for something that you are already doing, and that it’s clear why you need randomness in your residuals. But why residuals autocorrelation would affect the coefficient standard errors? The NIST Engineering Statistics Handbook has a nice description of autocorrelation in section 1.3.5.12 . 1. I understand the AR(p) process. Truth be told, it can vary depending on what you want to try to measure. Is autocorrelation a good thing or a bad thing? Autocorrelation is the tendency for observations made at adjacent time points to be related to one another. Is autocorrelation a good or bad thing and why do we need to look for it? Suppose, for example, you are analyzing stock market data. Dealing with Multiple Modes First, Identify Relevant Portion of Parameter Space • Physical intuition • Simplified statistical model • Simplified physical model • Analyze subset of data Then, perform MCMC with good initial guesses In Minitab’s regression, you can perform the Durbin-Watson test to test for autocorrelation. Sources of Autocorrelation. In the case of stock market prices, there are psychological reasons why prices might continue to rise day after day until some unexpected event occurs. The effect of autocorrelation on volatility can be approximated by the following equation: where is the i th lag autocorrelation and k is the number of lags we are considering. On top of that it just glitches out on occasion. Then after some bad news, prices may continue to fall. Chapter 20: Autocorrelation . Autocorrelation refers to a problem in data collected repeatedly over time. We now give some of the reasons for the existence of autocorrelation. Autocorrelation is a characteristic of data in which the correlation between the values of the same variables is based on related objects. I usually have to go back and correct 2 to 3 words per sentence. A time series is a sequence of observations on a variable over time. When all the autocorrelations are 0, this reduces to the familiar square root of 12 rule. The whole gboard app is bad on iphone unfortunately. I love swiping to type but it's predictions are just horrendous. The keyboard will go blank in the middle of a swipe and move the cursor to the middle to the word block. These notes largely concern autocorrelation Issues Using OLS with Time Series Data Recall main points from Chapter 10: Time series data NOT randomly sampled in same way as cross sectional—each obs not i.i.d Why? Why is positive auto-correlation considered more important by most statisticians. From the Wikipedia article on autocorrelation : While it does not bias the OLS coefficient estimates, the standard errors tend to be underestimated (and the t-scores overestimated) when the … In this part of the book (Chapters 20 and 21), we discuss issues especially related to the study of economic time series. In this context, autocorrelation on the residuals is 'bad', because it means you are not modeling the correlation between datapoints well enough. We will often look at a data and see if there is indeed a trend and then create a stationary model out of it in order to an autoregressive regression of it. The Arima model can correct for autocorrelation, if the errors are correlated then a model for predicting weather in one state … Data is a “stochastic process”—we have one realization of the process from a set of all possible realizations The main reason why people don't difference the series is because they actually want to model the underlying process as it is. 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