Does first differencing reduce autocorrelation? Consider the models y t = 'x t + t ,
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Does first differencing reduce autocorrelation? Consider the models yt = β'xt + εt, where εt = ρεt−1 + ut and εt = ut −λut−1. Compare the autocorrelation of εt in the original model with that of vt in yt − yt−1 = β (xt −xt−1)+vt, where vt = εt −εt−1.
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For the firstorder autoregressive model the autocorrelation is Consider the first difference v t1 wh...View the full answer
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