Independence of observations, Managerial Accounting

Assignment Help:

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.


Related Discussions:- Independence of observations

How the tax credit will affect price and quantity , 1. In order to boost th...

1. In order to boost the housing market throughout 2009 and into 2010, the federal government offered a tax credit to first-time home buyers and some repeat buyers.

Describe the benefits of operating decisions - relevant cost, Relevant cost...

Relevant costs and benefits for operating decisions: In operating decisions, concentration is on best use of existing capacity. Incremental analysis based on differential cost

International transfer pricing-compliance and documentation, International ...

International transfer pricing Transfer pricing is a perennial issue, within the international tax community (Richard Casna, Accounting and Business, in the year February 1988)

Introduction to Management Accounting, What is Costco''s Financial decision...

What is Costco''s Financial decisions, Centralized or decentralized?

Explain out of pocket cost, Explain Out of pocket cost A cost which wil...

Explain Out of pocket cost A cost which will have to be paid to outsides as against cross such as depreciation, which do not require any cash payment this cost is relevant in t

Bank guarantees, Bank guarantee is one of the facilities which the commerci...

Bank guarantee is one of the facilities which the commercial banks extend in support of their clients in favour of third parties who will be the beneficiaries of the guarantees. In

What are the disadvantages of the cost accounting, Disadvantages of the cos...

Disadvantages of the cost accounting: 1. It is unnecessary: it is argued that maintenance of the cost records is not necessary and involves duplication of work. It is based o

What is the significance of performance budgeting, Significance of performa...

Significance of performance budgeting Performance budgeting will help the management of companies by introduction of management objective to improve performance. Further it wi

What are the features of product life cycle costing, Features of product li...

Features of product life cycle costing Product life cycle costing is important due to the following features: 1) product life cycle costing involves tracing of costs and re

Select appropriate alternative courses of action, Select Appropriate Altern...

Select Appropriate Alternative Courses of Action In practice, decision-making includes choosing among competing alternative courses of action and choosing the alternative which

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd