A simple linear regression, y = 0 + 1 x + , is estimated w ith tim e series data. The resulting residuals e and

A simple linear regression, y = β0 + β1 x + ε, is estimated w ith tim e series data. The resulting residuals e and the tim e variable fare shown below.

1 2 3 4 5 6 7 8 9 10

- 5 - 4 - 2 3 6 8 4 - 5 - 3 - 2

a. Graph the residuals against tim e and look for any discernible pattern.

b. Which assumption is being violated? Discuss its consequences and suggest a possible remedy.

Applications