# Definition of dynamic noise and observational noise in finance

Hi,

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

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) + ... + ake(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 ri(t) = b0 + b1rm(t) + ui(t) for asset i, observational noise may be $$\widehat {u_i}(t) = r_i(t) - \widehat {b_0} - \widehat {b_1} r_m(t)$$. These are my guesses.