Framework and Assumptions Example 1 [Autoregressive (AR)Model]: .Consider an AutoRegressive AR(1)model Yi Bo+B1Yi-1+6t, t=1,,n, XB+Et, {et}~IID(0,o2), where Xt=(1,Yi-1)'. This is a dynamic regression model because the term BiY-1 represents the “memory”or“feedback'”of the past into the present value of the process, which induces a correlation between Yt and the past. The disturbance et can be viewed as representing the effect of "new infor- mation"that is revealed at time t.Any information that is truly new can- not be anticipated so that the effects of today's new information should be unrelated to the effects of yesterday's news in the sense that E(tXt)=0. ADVANCED ECONOMETRICS Classical Linear Regression Model May11,2021 8ADVANCED ECONOMETRICS Classical Linear Regression Model May 11, 2021 8 Framework and Assumptions Example 1