![]() That’s not the same as the denominator in the calculation of the standard error of the autocorrelation that number is always n (108 in this case). The number of degrees of freedom _ for the model _ is 108 – 1 – 1 = 106. 108 - 1 - 1 = 106?Īny insight would be greatly appreciated. We are given a table with autocorrelations, standard errors, and the t-stat. I know you don’t have the books but all they are doing is looking at whether the autocorrelations are significant. We would have to modify the model specification before continuing with the analysis.” The t-statistic for each lag is significant at the 0.01 level. We have 108 observations, so the standard error of the autocorrelation is 1/ T, or in this case 1/ 108 = 0.0962. “In a correctly specified regression, the residuals must be serially uncorrelated. Then, why in the CFAI (R.13, Q#13), they say the following: That’s how I understood degree of freedom as well. Magician, thanks for the complete answer as always. But we understand that and adjust for it.) And why does that bias manifest itself as n – 1 vs n? Degrees of freedom: we lost one degree of freedom when we calculated (then used) the sample mean. (Of course, we don’t know the mean of the population, so we’re forced to use the sample mean. And what causes that bias? Using the mean calculated from the sample instead of using the mean of the population. If we divided by n, then the expected value of the sample variance would not equal the population variance, but if we divide by n – 1, then the expected value of the (bias-adjusted) sample variance _ does equal _ the population variance. And the name is quite suggestive: the reason that we make the adjustment is to remove the bias from the statistic. make an adjustment: divide by n – 1 instead of dividing by n. By adding the words “bias-adjusted”, it helps the candidates to remember that they have to. Whenever I teach quants, I refer to that statistic by its full, proper name: the _ bias-adjusted _ sample variance. If, for example, you’re referring to dividing the sample variance by n – 1 rather than dividing by n (as we do for a population variance), then you’re exactly right: it’s a degrees-of-freedom thing. It would be nice if Kahn Academy would present videos on multiple linear regression and time series so we could all understand the nuansances of this lesson. ![]() I’m sure this n-k-1 degrees of freedom is all related. Kahn Academy has an excellent video on why we divide by n-1, rather than n. In linear regression, we end up using n-2 in many calculations or really, n-k-1 degrees of freedom as stated above. A related question I had was why we divide by n-1 when calculating some statistics rather than by n. In general, for linear regression where you have k input varaibles, so you compute k slopes and one intercept, you lose k + 1 degrees of freedom: you’ll have n – k – 1 degrees of freedom with n data points.įor what it’s worth on this topic. If you have a sample of 500 ( x, y) data points and you calculate a slope and an intercept, then grab another sample of 500 ( x, y) data points, 498 of the _y_s can vary freely, but the last two must be specific values to get that same slope an intercept you’ve lost two degrees of freedom. For every such statistic you calculate, you lose a degree of freedom. If you’re doing a linear regression, for example, then you’ll calculate a number of statistics specifically, an intercept and a number of slope coefficients. ![]() By calculating the mean, you have lost one degree of freedom. If you grabbed another sample of 500 giraffes with the intention of calculating their mean height – and you’re constrained to get the same mean as in your first sample (that’s the key constraint, and the explanation of this whole degrees-of-freedom thing) – then 499 of those giraffes can be any height whatsoever (they can vary freely), but the 500th one is constrained: its value must be the correct number to give you a mean height of 5.62 meters. ![]() (Capturing all of the giraffes in the world is too difficult, so you’ll use your sample and infer from that.) You calculate the mean height of the giraffes in your sample as 5.62 meters. Say you have a sample of 500 giraffes and you want to compute their average height. Every time you calculate a statistic you lose a degree of freedom.
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