A potential shortcoming of the Cochrane-Orcutt method for AR(1)is that it
A)drops the first the first two observations.
B)drops the first observation.
C)does not typcially estimate $\hat { \rho }$ correctly.
D) $\hat { \rho }$ no longer changes between iterations.

Question

Quizplus · Accepted Answer

The Cochrane-Orcutt method for AR(1) involves regressing the first differenced values of the variables on their lagged values, and then adjusting the coefficients to account for the autoregressive correlation. However, this method requires dropping the first observation in order to obtain an unbiased estimate of the error variance. Dropping the first two observations can be used in some cases, but is not always necessary. The method is generally effective at estimating the autoregressive coefficient, so option C is not a major concern. The autoregressive coefficient may change slightly between iterations, so option D is also not a significant drawback.

A Potential Shortcoming of the Cochrane-Orcutt Method for AR(1)is That ρ^\hat { \rho }ρ^​

A Potential Shortcoming of the Cochrane-Orcutt Method for AR(1)is That $\hat { \rho }$