The first step of the Regression test for the presence of AR(1)is to estimate the model and determine
A)the current period squared residuals.
B)the residuals lagged one period.
C)the current period residuals and the residuals lagged one period.
D)the current period residuals,the residuals lagged one period,and the residuals lagged two periods.

Question

Quizplus · Accepted Answer

In order to test for the presence of AR(1), we need to estimate the model and then look at the residuals. Specifically, we want to look at the autocorrelation between the current period residuals and the residuals lagged one period. This is because if there is an AR(1) process present, we would expect some correlation between these two sets of residuals. Looking at the residuals lagged two periods may also provide some information about the presence of AR(2), but this is not part of the initial step for testing for AR(1). Therefore, the best choice is C, which includes the current period residuals and the residuals lagged one period.

The First Step of the Regression Test for the Presence