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The residuals from a regression when plotted against time gave the scattergram in Figure 12.12. The encircled "extreme'' residual is called an outlier. An outlier is an observation whose value exceeds the values of other observations in the sample by a large amount, perhaps three or four standard deviations away from the mean value of all the observations.

a. What are the reasons for the existence of the outlier(s)?

b. If there is an outlier(s), should that observation(s) be discarded and the regression run on the remaining observations?

c. Is the Durbin-Watson d applicable in the presence of the outlier(s)?

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