Question: Suppose that the idiosyncratic errors in (14.4), {uit: t = 1, 2,....,T}, are serially uncorrelated with constant variance,it2. Show that the correlation between adjacent differences,

Suppose that the idiosyncratic errors in (14.4), {uit: t = 1, 2,....,T}, are serially uncorrelated with constant variance,σit2. Show that the correlation between adjacent differences, Δuit and ΔuI,t+1, is -.5. Therefore, under the ideal FE assumptions, first differencing induces negative serial correlation of a known value.

Step by Step Solution

★★★★★

3.42 Rating (168 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

First for each t 1 Var D u it Var u it u it 1 Var u i... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Document Format (1 attachment)

839-M-E-E-A (736).docx

120 KBs Word File

Students Have Also Explored These Related Econometric Questions!

Suppose that the probabilities are 0.60, 0.20, 0.10, and 0.10 that a state income tax return will be filled out correctly, that it will contain only errors favoring the taxpayer, that it will contain...

Suppose that the data of Exercise 22 have round-off errors given by the following table. Calculate the errors due to round-off in Exercise 22. 1.8 2.0 2.4 2.6 Error in f(x) 2 x 10 62 x 1006 -902 10

With a single explanatory variable, the equation used to obtain the between estimator is where the overbar represents the average over time. We can assume that E(a.) = 0 because we have included an...

14.1 Suppose that the idiosyncratic errors in (14.4), {uit: t 1,2, , T}, are serially uncorrelated with constant variance, u 2. Show that the correlation between adjacent differences, uit and ui,t1,...

1 4 . 1 Suppose that the idiosyncratic errors in ( 1 4 . 4 ) , { u i t : t = 1 , 2 , . . . , T } , are serially uncorrelated with constant variance, 2 . Show that the correlation between adjacent...

Probability and Statistics - Problem Set c Keith M. Chugg October 2, 2015 1 Preliminaries, Combinatorics, Set Probability 1.1. A number of bats are in a cave. 2 bats can see out of their left eye. 3...

Consider the production relationship on Chinese firms used in several chapter examples. We now add another input, MATERIALS. Use the data set from the data file chemical3 for this exercise. (The data...

Kindly assist Consider a standard multiple linear regression model with time series data: VI = bo + bixn + ... + box+ Uit. Assume that all the classical assumptions except for no serial correlation...

Card, D., Krueger, A.B. (1994). Minimum wages and employment: a case study of the fast-food industry in New Jersey and Pennsylvania. American Economic Review, 84(4), 772-93. Once you have read your...

Durham Bike Shop Ltd.'s year end is December 31. Some of the company's transactions are as follows: March 1 Paid $190,000 cash to purchase the following assets: Asset Land Building Market Value...

Prove that three-dimensional source flow is a physically possible incompressible flow.

2 What are the potential risks and rewards of accepting the order from M&S?

Show that the numerator sum of squares for testing the hypothesis H,, defined in (11.29), is given by (11.30). Do this algebraically and in matrix form by writing the appropriate hypothesis matrix...

(-8x + 5y 12) 6(2x 4y 10)

Evaluate 2x squared when x = 5 and when x = -5

[6(x + 4) 12] [5(x 8) + 14]

You are considering investing in an 7% coupon rate bond with a three-year maturity and a face value of $1000. You observe the following prices for discount, or zero-coupon, bonds with face values of...

homeowners can obtain $ 1 0 , 0 0 0 coverage for sewage and drain backup damage. Multiple Choice $ 1 0 0 a year $ 1 , 0 0 0 a year $ 1 0 0 a month $ 2 0 0 to $ 3 0 0 per year $ 3 0 0 to $ 4 0 0 per...

failed assumptions This information will be used for the next two questions: You are curious why some apartments in West Campus cost more to rent than others. So you sample 30 one-bedroom apartments...