hard · FRM Part 1 Quantitative Analysis
An analyst is concerned that a time-series regression of equity returns on interest rates suffers from positive serial correlation in the residuals.
If the analyst ignores this and uses standard OLS, what is the most likely impact on the hypothesis tests for the coefficients?
- Standard errors will be understated, leading to overinflated t-statistics and frequent Type I errors.
- Standard errors will be overstated, making it too difficult to reject the null hypothesis.
- The coefficient estimates will be biased and inconsistent.
- The R² will be systematically lower than the true population value.
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