1.

Given the following regression model:

Yi = β1 + β2 X 2i + β3 X 3i + ui i = 1,2,..., 40

1.a. We sort the data of all the variables in the model depending of the ascending order of
variable X3 and the model is estimated twice: first, using only the first 14 observations, and
then, using only the last 14 observations. The squared sum of the residuals (SSR) of the first
regression (using the fist 14 observations) is 3452,27, while for the second (using the last 14
observations) is 4895,23. Which test we are using? When can we use this test? Which are the
null and the alternate hypothesis? Which is the conclusion of the test?. (0,75 points).

We are using the GQ (Goldfelt-Quandt) test to test for heteroskedasticity brought by the X3
variable. The null hyp is homoscedasticity and the alternative hypothesis is heteroskedasticity
linearly depending on X3. The test statistics is (SSR(2)/(n(2)-k))/ (SSR(1)/(n(1)-
k))=4895.23/3452.27=1.42. It follows an F statistics with (11,11) dof=2.82 so we fail to reject
the null hyp. There is not evidence of heteroskedasticity driven by the X3 variable.

1.b. Finally, we estimate the following auxiliary regression:

And we find that the ESS is 6.32. Which test are we using? Which are the null and the
alternative hypotheses? Which is the conclusion of the test? (0,5 points).

The Breusch-Pagan test. The null hyp is homoscedasticity, the alternative hypothesis is
heteroskedasticity linearly dependent by X2 and x3 (write a simple formulation). The test
statistics is ESS/2=6.32/2=3.16 which follows a chi-square with 2 dof=5.99
So we cannot reject the null hyp. Of homoskedasticity.
1.c Based on previous results, can we definitively assume that the disturbance term does not
show the problem that the previous tests are testing? Why or why not?

No, there could still be heteroskedasticity driven by X1 or other transformation (such as powers)
of the variables X2 and X3 (even if the latter is unlikely). Until we do not carry out a general
white test, we cannot be sure of our findings on absence of heteroskedasticity.

2. In a regression model: Yi = β1 + β2 X2i + ...+ βk Xki + ui , (i= 1,...30), we know that

var [ ui ] = σu2 ( λ0 + λ1 X 2ji ).

Define the matrix T that would allow us to obtain an efficient estimation (0,5 points).

The best formulation for the matrix T, involves first to estimate the lambdas, by performing a
regression of the residuals square on Xj^2. After obtained the estimations from lambdas, the
matrix T should have on the main diagonal the inverse of the square root of (λ
ɵ0 + λ X 2 ) .
1 ji

3. We are trying to model the fuel consumption in the United States. We have information from
1960 until 1995 for the following variables: Pg, fuel price index, Pnc, new cars price index and
Ppt, pubic transport price index. We estimate, by OLS, the following model:

Model (1)

With the following results:

Table 1.
OLS, using observations 1961-1995 (T = 35)
Dependent variable: Pg
Coefficient Std. Error t-ratio p-value
const -1,07485 0,406928 -2,6414 0,01282 **
Pnc 1,77621 0,579725 3,0639 0,00450 ***
Ppt -0,484656 0,16928 -2,8630 0,00746 ***
Pg_1 0,786494 0,10426 7,5436 <0,00001 ***

Mean dependent var 2,356371 S.D. dependent var 1,246731

Sum squared resid 2,117135 S.E. of regression 0,261333
R-squared 0,959939 Adjusted R-squared 0,956062
F(3, 31) 247,6051 P-value(F) 9,81e-22
Log-likelihood -0,570374 Akaike criterion 9,140748
Schwarz criterion 15,36214 Hannan-Quinn 11,28837
Rho (ρ) 0,318643
 3.a. Test for residual autocorrelation: Which test can you calculate with the information in
Table 1? What’s the value of the test statistic? Can we trust this test for Model (1)?. (0,75
points)

We can compute a h of Durbin since we have the presence of the lagged endogenous
variable in the regressors. The test statistic is:

T T
H = ρˆ = (1 − DW / 2)· ~ N (0,1)
1 − T ·var(αˆ1 ) 1 − T ·var(αˆ1 )

So in this case we have: H=0.318643*(35/(1-(35*(0.10426^2))))^0.5=2.40

Since the value for the normal distribution with those parameters is 1.64, we can reject
the null hyp, the error term follows a AR(1) process.

3.b. Explain in detail how to test the same null and alternative hypotheses of question 3.a
using the Breusch-Godfrey test. Justify your answer indicating the procedures we need to
use in order to calculate the test statistic and the decision criterion that you would use. (1
point)

In case we want to use the BG test and test the same assumption, we need to carry out an
auxiliary regression by regressing the residuals of the benchmark OLS estimation on the Xs
and one lagged value of the residuals. We take then the R2 of this regression and we
multiply it by T’ which is the number of observations in the auxiliary regression, which is
distributed as a chi-squared distribution with 1 dof (since we are testing AR(1) hypothesis).