Which of the following assumptions is needed for the usual standard errors to be valid when differencing with more than two time periods? A)The regression model exhibits heteroskedasticty. B)The differenced idiosyncratic error or u_it is uncorrelated over time. C)The unobserved factors affecting the dependent variable are time-constant. D)The regression model includes a lagged independent variable.

Question

Quizplus · Accepted Answer

When differencing with more than two time periods, the usual standard errors are only valid if the differenced idiosyncratic error is uncorrelated over time. Option A is not correct because heteroskedasticity can actually cause the standard errors to be invalid. Option C assumes stationarity of the unobserved factors, which may not hold in reality. Option D is irrelevant to the question of whether standard errors are valid.

Which of the Following Assumptions Is Needed for the Usual