Correlation of the regression error across observations
A)results in incorrect OLS standard errors.
B)makes the OLS estimator inconsistent, but not unbiased.
C)results in correct OLS standard errors if heteroskedasticity-robust standard errors are used.
D)is not a problem in cross-sections since the data can always be "reshuffled."

Question

Quizplus · Accepted Answer

Correlation of the regression error across observations violates the assumption of independent errors, leading to incorrect Ordinary Least Squares (OLS) standard errors. This issue does not automatically make the OLS estimator inconsistent or unbiased, nor can it be resolved by simply "reshuffling" data in cross-sections. Heteroskedasticity-robust standard errors address issues of non-constant variance but not correlation across error terms.

Correlation of the Regression Error Across Observations