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


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
Funds produced from operations, throughout an accounting period, raise working capital by an equivalent amount. The two major components of funds generated from operations are depr

You recently began a job as an accounting intern at Indoor Racing Ltd. Your first task was to help prepare the cash budget for February and March. Unfortunately, the computer with

Management Accounting 1) Which is concerned with provision of information to people within the organization to help them make better decisions? Management accounting is concer

What is Budgetary control Budgetary control is the process of determining various budgeted figures for the enterprises for the future period and then comparing the budgeted fi

Using one of the companies from DQ 1, describe how inventory planning and accuracy can be defined using the Pareto principle. The company is Target, Inc.

Problem Marginal costing plays a major role in making certain decisions. It provides information to management regarding the behaviour of costs and the incidence of such costs

1) What is the difference between decreasing marginal returns and negative marginal returns?   2.) "A firm in monopolistic competition maximizes its profit by producing where it

Characteristics of cost reduction 1) Cost reduction must be real : said through increase in productivity change in product design improvement in technology etc. 2) Cost r

Explain the Features of budgetary control From the definition the following features of budgets control emerge: 1) Establishment of budgets: budgets are prepared for each

Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4