what do error terms tell us 
within a linear regression model tracking a stock s price over time the error term is the difference between the expected price at a particular time and the price that was actually observed in instances where the price is exactly what was anticipated at a particular time the price will fall on the trend line and the error term will be zero points that do not fall directly on the trend line exhibit the fact that the dependent variable in this case the price is influenced by more than just the independent variable representing the passage of time the error term stands for any influence being exerted on the price variable such as changes in market sentiment the two data points with the greatest distance from the trend line should be an equal distance from the trend line representing the largest margin of error if a model is heteroskedastic a common problem in interpreting statistical models correctly it refers to a condition in which the variance of the error term in a regression model varies widely linear regression error term and stock analysislinear regression is a form of analysis that relates to current trends experienced by a particular security or index by providing a relationship between a dependent and independent variables such as the price of a security and the passage of time resulting in a trend line that can be used as a predictive model a linear regression exhibits less delay than that experienced with a moving average as the line is fit to the data points instead of based on the averages within the data this allows the line to change more quickly and dramatically than a line based on numerical averaging of the available data points the difference between error terms and residualsalthough the error term and residual are often used synonymously there is an important formal difference an error term is generally unobservable and a residual is observable and calculable making it much easier to quantify and visualize in effect while an error term represents the way observed data differs from the actual population a residual represents the way observed data differs from sample population data 