BSE3703: Does No Serial Correlation Assumption hold? Why?: Econometrics for Business I Assignment, NUS, Singapore

(a) Does No Serial Correlation Assumption hold? Why?
(b) Does Contemporaneous Exogeneity Assumption hold? Why?
(c) Show how one can solve the problems by including additional lagged dependent variable 𝑦𝑡−2 in the original model

(a) Does No Serial Correlation Assumption hold? Why?
(b) Does Contemporaneous Exogeneity Assumption hold? Why?
(c) Show how one can solve the problems by including additional lagged dependent variable 𝑦𝑡−2 in the original model.

(a) Calculate the variance of the 𝑦𝑡 process
(b) Calculate Cov(𝑦𝑡, 𝑦𝑡−1).
(c) Calculate a more general case 𝐶ov(𝑦𝑡, 𝑦𝑡−ℎ), where h≥1. [Appendix C in Lecture Note 4 provides you an idea of how to do it.]
(d) Based on (b) and (c) answers, find out the autocorrelation function 𝜌𝜌ℎ.
(e) Sketch a plot of the autocorrelation function, where 𝜌𝜌ℎ denotes y-axis and h denotes x-axis. Explain this plot.