FRM Part I · FRM Exam Part I · Regression Diagnostics
In testing residuals for serial correlation, a Durbin-Watson statistic is computed as 2.90 for a regression with a sufficiently large sample. What does this imply?
A Durbin-Watson value of 2.90 implies strong negative first-order autocorrelation. Using ρ ≈ 1 − DW/2 gives 1 − 1.45 = −0.45, so successive residuals tend to alternate in sign.
- AStrong positive first-order autocorrelation, with ρ about 0.45
- BNo autocorrelation, since DW values above 2 are always acceptable
- CStrong negative first-order autocorrelation, with ρ about −0.45Correct
- DStrong negative first-order autocorrelation, with ρ about −1.45
Explanation
ρ ≈ 1 − DW/2 = 1 − 1.45 = −0.45. A DW well above 2 indicates negative autocorrelation. −1.45 forgets to subtract from 1 properly and is outside the valid range of correlation.
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