The second step in the first iteration of the Cochrane-Orcutt method for AR(1)is to estimate the model
A) $e _ { t } = \rho e _ { t - 1 } + u _ { t }$ to generate an estimate of $\hat { \rho }$ .
B) $e _ { t - 1 } = \rho e _ { t } + u _ { t }$ to generate an estimate of $\hat { \rho }$ .
C) $e _ { t } = \rho _ { 1 } e _ { t - 1 } + \rho _ { 2 } e _ { t - 2 } + u _ { t }$ to generate an estimate of $\hat { \rho } _ { 1 }$ and $\hat { \rho } _ { 2 }$ .
D) $y _ { t } = \rho x _ { t - 1 } + u _ { t }$ to generate an estimate of $\hat { \rho }$ .

Question

Quizplus · Accepted Answer

In the Cochrane-Orcutt method for AR(1), the second step involves estimating the model $e_t=\rho e_{t-1}+u_t$ to obtain an estimate of the autoregressive parameter $\rho$. This estimate is then used to transform the original data series and the process is repeated until convergence. Therefore, the best choice is A as it correctly represents the model to be estimated in the second step.

The Second Step in the First Iteration of the Cochrane-Orcutt et=ρet−1+ute _ { t } = \rho e _ { t - 1 } + u _ { t }et​=ρet−1​+ut​

The Second Step in the First Iteration of the Cochrane-Orcutt $e _ { t } = \rho e _ { t - 1 } + u _ { t }$