Table 7 following shows the autocorrelations of the residuals from an AR(1) model fit to the changes in the gross profit margin (GPM) of The Home Depot, Inc.
TABLE 7 Autocorrelations of the Residuals from Estimating the Regression ΔGPM t = 0.0006 ˆ’ 0.33301 ΔGPM t ˆ’1 + ε t 1Q:1992-4Q:2001 (40 Observations)
Lag.................................Autocorrelation
1....................................ˆ’0.1106
2....................................ˆ’0.5981
3....................................ˆ’0.1525
4....................................0.8496
5....................................ˆ’0.1099
Table 8 shows the output from a regression on changes in the GPM for Home Depot, where we have changed the specification of the AR regression.
TABLE 8 Change in Gross Profit Margin for Home Depot 1Q:1992-4Q:2001
Regression Statistics
R-squared............................0.9155
Standard error.......................0.0057
Observations.............................40
Durbin-Watson....................2.6464

A. Identify the change that was made to the regression model.
B. Discuss the rationale for changing the regression specification.

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Standard Error 0.0009 0.0687 Coefficient t-Statistic Intercept AGPM,-1 -0.0610 -0.0001 -0.0608 -0.8850 12.8683 0.8720 AGPM,4 0.0678