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Managing Serial Correlation in PPNR CCAR Stress Test Models

Pros and Cons of AR Errors, Newey-West SEs, and FGLS Serial correlation – i.e., that the past usually affects the future – is an inherent complication of PPNR Stress Test modeling, and of time series modeling in general. However, serial correlation violates a core assumption of linear regression, and thus has the potential to bias PPNR models and reduce overall macroeconomic sensitivity. There are several effective — albeit no silver bullet — methods of dealing ...

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