Definition of dynamic noise and observational noise in finance

orochimaru

Hi,

i have problems differentiating these two terms. can anyone give some examples of these two terms? Thanks!

EnumaElish

This is the first time that I have encountered these specific concepts. If I had to guess, dynamic noise may be something like an AR (autoregressive) error structure; i.e. e(t) = a₀ + a₁e(t-1) + ... + a_ke(t-k) where e(s) is the noise term in period s. Observational noise may be the empirical error term that a model estimation might produce, e.g. when estimating the CAPM equation r_i(t) = b₀ + b₁r_m(t) + u_i(t) for asset i, observational noise may be [tex]\widehat {u_i}(t) = r_i(t) - \widehat {b_0} - \widehat {b_1} r_m(t)[/tex]. These are my guesses.