Independence of observations, Managerial Accounting

Independence of observations

An important assumption for the simple linear regression model is the independence of errors. In many time series models, this assumption is violated because of the correlation of errors in successive observations. This is termed to as autocorrelation.

Autocorrelation occurs if a positive error is followed by another positive error and a negative error is followed by another negative error. If autocorrelation occurs then time should be considered as an important independent variable and therefore time varies analysis should be used.

We can use Durbin Watson ‘D’ statistics to determine whether observations are independent.
D = ∑(ei – ei-1)2
        ∑ei2

Where:

ei is the error in time i
ei-I is the error in time i-I

The Durbin Watson statistics provides a measure of association between successive values of the error term. The computed statistics is compared against two tabulated values du and dl that depend on the desired confidence level of the test and the degrees of freedom of the data.

If the computed Durbin Watson “D” statistics is greater than Du, then we can conclude that there’s no positive correlation between error terms.

If dl ≤ D≤ du then the test is inconclusive and therefore we can neither accept nor reject the null hypothesis.

Posted Date: 12/5/2012 6:26:13 AM | Location : United States







Related Discussions:- Independence of observations, Assignment Help, Ask Question on Independence of observations, Get Answer, Expert's Help, Independence of observations Discussions

Write discussion on Independence of observations
Your posts are moderated
Related Questions
Q. Show the Pricing during market growth? Pricing during market growth: in the growth stage there is steep rise in the turnover of the company. As prices of new competitors

Illustration of Graphic Analysis The four steps of cost-volume-profit analysis can be employed to graph and study any cost-volume relationship. Suppose that you have been aske

i want to get the answer for exercises 2.1 and 2.2 on strategic and tactical decisions

Recommend whether marginal or absorption costing should be use for internal monthly reporting

Advance Factoring and Maturity Factoring: In both recourse and non-recourse factoring whether the factor advances cash against book debts to the client instantly on assignment

Replacement cost It is the cost of replacing a material or asset, by purchase from the current market. If an X material was originally purchased @ Rs. 250 per Kg. And know i

CONTIGENCY THEORY Some researchers have argued that the context in which budgetary control is used is as important as the style in which it is implemented and used. This is ter

identify and explain the many classification of costs for planning, control,performance evaluation and decision making.

Kent Company had 800 units of product in its assembly department's work in process inventory at the starting of the period. During the period 3,000 additional units of product were

What are the objectives of excellence teams and minicompanies? Did the companies achieve these objectives?estion #Minimum 100 words accepted#