Page "Econometrics" Paragraph 19

This assumption is violated when there is autocorrelation.

Autocorrelation can be visualized on a data plot when a given observation is more likely to lie above a fitted line if adjacent observations also lie above the fitted regression line.

Autocorrelation is common in time series data where a data series may experience " inertia.

" If a dependent variable takes a while to fully absorb a shock.

Spatial autocorrelation can also occur geographic areas are likely to have similar errors.

Autocorrelation may be the result of misspecification such as choosing the wrong functional form.

In these cases, correcting the specification is the preferred way to deal with autocorrelation.