Category Springer Texts in Business and Economics


Violation of assumption 3 means that the disturbances are correlated, i. e., E(щUj) = aj = 0, for i = j, and i, j = 1,2,…,n. Since ui has zero mean, E (uiUj) = cov(ui, Uj) and this is denoted by aij. This correlation is more likely to occur in time-series than in cross-section studies. Consider estimating the consumption function of a random sample of households. An unexpected event, like a visit of family members will increase the consumption of this household. However, this positive disturbance need not be correlated to the disturbances affecting consumption of other randomly drawn households. However, if we were estimating this consumption function using aggregate time-series data for the U. S...

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