Running OLS on data

Model 1: OLS, using observations 1-88

Dependent variable: ROA

Coefficient Std. Error t-ratio p-value

const 0.139744 0.0674604 2.0715 0.04142 **
CA -0.0344318 0.0703644 -0.4893 0.62589
Lqdt -0.11644 0.07874 -1.4788 0.14298
Lvrg -0.0841073 0.0505971 -1.6623 0.10023
Sz 0.0039286 0.00312114 1.2587 0.21167

Mean dependent var 0.096891 S.D. dependent var 0.026500

Sum squared resid 0.056552 S.E. of regression 0.026103
R-squared 0.074394 Adjusted R-squared 0.029787
F(4, 83) 1.667756 P-value(F) 0.165242
Log-likelihood 198.5307 Akaike criterion -387.0614
Schwarz criterion -374.6747 Hannan-Quinn -382.0711

Now checking Autocorrelation :- For this data were defined as time series in gretl option.

1. Autocorrelation Detection Test

1.1 Durbon Watson Test:-

Hypothesis:-

H0: There is no problem of auto correlation

H0: there is a problem of auto correlation
2. Model 1: OLS, using observations 1950-2037 (T = 88)
3. Dependent variable: ROA
4.
Coefficient Std. Error t-ratio p-value
const 0.139744 0.0674604 2.0715 0.04142 **
CA -0.0344318 0.0703644 -0.4893 0.62589
Lqdt -0.11644 0.07874 -1.4788 0.14298
Lvrg -0.0841073 0.0505971 -1.6623 0.10023
Sz 0.0039286 0.00312114 1.2587 0.21167
5.
Mean dependent var 0.096891 S.D. dependent var 0.026500
Sum squared resid 0.056552 S.E. of regression 0.026103
R-squared 0.074394 Adjusted R-squared 0.029787
F(4, 83) 1.667756 P-value(F) 0.165242
Log-likelihood 198.5307 Akaike criterion -387.0614
Schwarz criterion -374.6747 Hannan-Quinn -382.0711
rho 0.449192 Durbin-Watson 1.100797
Interpeting The results:-

In the above output we have Durbin Watson calculated value 1.100797 (d=1.100797), we have to
check this value in critical region. The upper and lower value of Durbin Watson critical region value
will be checked at 5% level of significance. We don’t have Dl and DU points for 88 th observation
therefore at 90th observation the points are taken.

Dl=1.566

DU=1.751

4-DU= 4-1.751=2.249

4-DL=4-1.566=2.434

After checking Durbin Watson calculated value in critical region we have concluded that d calculated
value fall in rejection area therefore our null hypothesis will be rejected and we have problem of
autocorrelation. Or p-value = 1.68134e-006 (0.000000168134) less than significance level 0.05 so we
reject our null hypothesis and we have problem of autocorrelation.

2. Breuch God Frey

Hypothesis:

H0: There is no autocorrelation

H1: there is autocorrelation.

Breusch-Godfrey test for autocorrelation up to order 2

OLS, using observations 1950-2037 (T = 88)

Dependent variable: uhat

coefficient std. error t-ratio p-value

---------------------------------------------------------

const -0.00442077 0.0614268 -0.07197 0.9428

CA 0.0208059 0.0639913 0.3251 0.7459

Lqdt 0.00900777 0.0719366 0.1252 0.9007

Lvrg 0.00535330 0.0458813 0.1167 0.9074

 Sz -0.000281481 0.00284219 -0.09904 0.9214

uhat_1 0.437011 0.111716 3.912 0.0002 ***

uhat_2 0.0407746 0.113077 0.3606 0.7193

Unadjusted R-squared = 0.205498

Test statistic: LMF = 10.475306,

with p-value = P(F(2,81) > 10.4753) = 8.99e-005

Alternative statistic: TR^2 = 18.083793,

with p-value = P(Chi-square(2) > 18.0838) = 0.000118

Ljung-Box Q' = 23.2369,

with p-value = P(Chi-square(2) > 23.2369) = 9e-006

Interprtation

2 2
χ calculated value is (n− p )R =(88-2)x 0.205498=17.67283

Now χ 2 tabulated

χ 2 (0.05)(2)=5.9914.

Our Chi square calculated value is greater than (17.67283> 5.9914) chi square tabulated value so
we may reject the null hypothesis and we have problem of autocorrelation.
Remedy to Autocorrelation

Cochrane Orcut Test

Interpretation:-

In the above result it is shown that at third iteration our value of Roh became constant and it changes
no more therefore we conclude that there is no more autocorrelation problem. The value of roh at 3 rd
iteration is 0.48 and at 4th iteration it is also 0.48 this indicate no autocorrelation.

HetroSkedasity

Detection Test

1. Gold Felf quadnt Test. (This test is for one indepent variable but for the sake of understanding
this is applied)
Fcal=RSS2/RSS1
Ftab=(a)(v1,v2)
 n−c −2 k
2
v1=v2=

v1 is degree of freedom 1 and v2 is degree of freedom 2 where as c is

the number of observations excluded and k is the number of
parameters.

Hypothesis:-

H0: There is no problem of heteroskedasticity

H1: There is problem of heteroskedasticity.
Step 1 Calculating RSS1 value.

Model 1: OLS, using observations 1-33

Dependent variable: ROA

Coefficient Std. Error t-ratio p-value

const -0.187853 0.118262 -1.5885 0.12341
CA 1.2033 0.910859 1.3211 0.19717
Lqdt 0.66182 0.92059 0.7189 0.47815
Lvrg 0.0623529 0.166612 0.3742 0.71105
Sz 0.00906232 0.00495525 1.8288 0.07810 *

Mean dependent var 0.079128 S.D. dependent var 0.036680

Sum squared resid 0.008544 S.E. of regression 0.017468
R-squared 0.801543 Adjusted R-squared 0.773192
F(4, 28) 28.27220 P-value(F) 1.80e-09
Log-likelihood 89.44893 Akaike criterion -168.8979
Schwarz criterion -161.4153 Hannan-Quinn -166.3802

RSS1= 0.008544

Step 2 RSS2

Model 2: OLS, using observations 56-88 (n = 33)

Dependent variable: ROA

Coefficient Std. Error t-ratio p-value

const 0.100517 0.00215048 46.7416 <0.00001 ***
CA -0.0124602 0.00645637 -1.9299 0.06381 *
Lqdt 0.14647 0.0152808 9.5853 <0.00001 ***
Lvrg -0.00572378 0.00177942 -3.2167 0.00326 ***
 Sz -0.00011127 0.000103943 -1.0705 0.29354

Mean dependent var 0.110917 S.D. dependent var 0.003477

Sum squared resid 0.000010 S.E. of regression 0.000606
R-squared 0.973414 Adjusted R-squared 0.969616
F(4, 28) 256.2965 P-value(F) 1.29e-21
Log-likelihood 200.3626 Akaike criterion -390.7253
Schwarz criterion -383.2427 Hannan-Quinn -388.2076

RSS2 = 0.000010
Interpretaion
Fcal=RSS2/Rss1= 0.000010/0.008544= 0.000117041

Ftab=(a)(v1,v2)
n−c −2 k
2
v1=v2=

v1=v2= (88-22-2(5))/2
v1=v2=28

Ftab(0.05)(28,28)=1.87 at F(28,30) we don’t have for (28,28) at f distribution table.

Fcal value is less than Ftab i.e. (0.000010 < 1.87) which means we may accept our null hypothesis and
conclude that we have no problem of heteroskedasticity.

2. Breusch Pagan Godfrey Test:-.

Hypothesis:-
H0: There is no problem of heteroskedasticity
H1: There is problem of heteroskedasticity.
Interpretation:-

χ2
In the above results ESS value is 80.2249 to divide this value by 2 we will get calculated
value i.e. 80.2249/2= 40.11247
2
χ
tabulated=(0.05)(5-1)
2
χ
tabulated=(0.05)(4)=9.48773
2 2
χ χ
Conclusion:- calculated value is greater than tabulated value i.e. 40.11247 > 9.48773
we may reject our null hypothesis and we have problem of heteroskedasticity.

3. White generalized test:-

Hypothesis:-
H0: There is no problem of heteroskedasticity
H1: There is problem of heteroskedasticity.
 Interpretation
In the above table we have unadjusted R2 = 0.201673 we have to multiply this value with n i.e.
88 to get chi square calculated value.

2
χ calculated= 0.201673 x 88 = 17.747224.
2
χ tabulated=(0.05)(14)=23.6848
2 2
Conclusion:- As χ calculated value is greater than χ tabulated (17.747224 >23.6848) we
will reject our null hypothesis and we have problem of heteroskedasticity.

Remedy to hetroskedasticity
White corrected Test

Model 2: Heteroskedasticity-corrected, using observations 1-88

Dependent variable: ROA

Coefficient Std. Error t-ratio p-value

const 0.017264 0.0965719 0.1788 0.85855
CA 0.0836788 0.0938226 0.8919 0.37503
 Lqdt -0.149233 0.0222854 -6.6965 <0.00001 ***
Lvrg 0.0184267 0.0897924 0.2052 0.83791
Sz 0.00592707 0.0010828 5.4739 <0.00001 ***

Statistics based on the weighted data:

Sum squared resid 516.5300 S.E. of regression 2.494645
R-squared 0.481795 Adjusted R-squared 0.456821
F(4, 83) 19.29207 P-value(F) 2.98e-11
Log-likelihood -202.7376 Akaike criterion 415.4753
Schwarz criterion 427.8620 Hannan-Quinn 420.4656

Statistics based on the original data:

Mean dependent var 0.096891 S.D. dependent var 0.026500
Sum squared resid 0.060415 S.E. of regression 0.026979

Interpretation:-
After running robust test the option of heteroskedasticity was not avaible in test tab which means we
have no more heteroskedasticity in our model.

Multicolinearity:-

Detection Test
1.Correlation Matrix

Correlation coefficients, using the observations 1 - 88

5% critical value (two-tailed) = 0.2096 for n = 88

ROA CA Lqdt Lvrg Sz

1.0000 0.0091 -0.1342 -0.1439 0.0891 ROA
1.0000 0.0826 -0.7441 -0.5224 CA
1.0000 -0.0120 0.2144 Lqdt
1.0000 0.3270 Lvrg
1.0000 Sz

Interpretation:-
We have three methods to check whether we have multicolineartiy among the independt variables.
First Method:-
Check correation between independent variables and comparing it with 0.6. If the value of correlation is
greater than 0.6 so we have munlticolinearty among independent variables.

Correlation value of CA and SZ is 0.5224 < 0.6 so there is no multicolineartiy among them
Correlation value of lgdt and SZ is 0.2144< 0.6 so there is no multicolineartiy among them
Correlation value of lvrg and sz is 0.3270< 0.6 so there is no multicolineartiy among them
Correlation value of CA and Lqdt is 0.0826> 0.6 so there is multicolineartiy among them
Correlation value of CA and lvrg is 0.7441> 0.6 so there is multicolineartiy among them
Correlation value of lvrg and lqdt is 0120< 0.6 so there is no multicolineartiy among them

Method 2.
Comparing the correlation value of two independent variables with the correlation value of one
dependent and one independent variable (X1,X2 with Y,X1 and X1,X2 with YX2).

Correlation value of CA and SZ is 0.5224 while the correlation value of CA and ROA is 0.0091 (0.5224 <
0.00910), Further correlation value of SZ and ROA is 0.0891as (0.5224<0.0891) so we have no
multicolinearity problem.

Method 3.
VIF method

Interpretation:

Value of VIF of all independent variables is less than 10 So we have no multicolineartiy problem among
the independent variables.

Diagnostic Tes
 Structural break.

Chow Test:-

Hypothesis:-

H0: There is no problem of structural break or the data is normal.

H1: There is problem of structural break or the data is not normal.

Interpretation :-

In the above table we have F calculated value is 4.79397 and its p value is 0.0007 which is less than 0.05
so we have to reject our null hypothesis and we concluded that we have structure break problem in our
data.
2. MWD TEST (Makinnon, White, Davidson Test).

Hypothesis
Ho: Linear Model is good.
H1: Log linear Model is good.

Linear Model

Model 4: OLS, using observations 1-88

Dependent variable: ROA

Coefficient Std. Error t-ratio p-value

const 0.139744 0.0674604 2.0715 0.04142 **
CA -0.0344318 0.0703644 -0.4893 0.62589
Lqdt -0.11644 0.07874 -1.4788 0.14298
Lvrg -0.0841073 0.0505971 -1.6623 0.10023
Sz 0.0039286 0.00312114 1.2587 0.21167

Mean dependent var 0.096891 S.D. dependent var 0.026500

Sum squared resid 0.056552 S.E. of regression 0.026103
R-squared 0.074394 Adjusted R-squared 0.029787
F(4, 83) 1.667756 P-value(F) 0.165242
Log-likelihood 198.5307 Akaike criterion -387.0614
Schwarz criterion -374.6747 Hannan-Quinn -382.0711

Log Linear Model:-

Model 5: OLS, using observations 1-88 (n = 86)

Missing or incomplete observations dropped: 2
Dependent variable: l_ROA

Coefficient Std. Error t-ratio p-value

const -5.83613 2.14393 -2.7222 0.00794 ***
l_CA -0.183538 0.147156 -1.2472 0.21591
l_Lqdt -0.209192 0.152964 -1.3676 0.17523
l_Lvrg -2.02109 1.08083 -1.8699 0.06511 *
l_Sz 0.913675 0.814858 1.1213 0.26549

Mean dependent var -2.382441 S.D. dependent var 0.645126

Sum squared resid 32.89843 S.E. of regression 0.637302
R-squared 0.070035 Adjusted R-squared 0.024110
F(4, 81) 1.525002 P-value(F) 0.202689
Log-likelihood -80.70905 Akaike criterion 171.4181
Schwarz criterion 183.6898 Hannan-Quinn 176.3569
 Z Model

Model 6: OLS, using observations 1-88 (n = 86)

Missing or incomplete observations dropped: 2
Dependent variable: ROA

Coefficient Std. Error t-ratio p-value

const 0.112607 0.0510942 2.2039 0.03040 **
CA -0.0784604 0.0527322 -1.4879 0.14071
Lqdt -0.197765 0.076858 -2.5731 0.01193 **
Lvrg -0.0947432 0.0536019 -1.7675 0.08095 *
Sz 0.00462362 0.00237603 1.9459 0.05517 *
Z -0.0175839 0.0239973 -0.7327 0.46585

Mean dependent var 0.099890 S.D. dependent var 0.017700

Sum squared resid 0.021425 S.E. of regression 0.016365
R-squared 0.195477 Adjusted R-squared 0.145194
F(5, 80) 3.887550 P-value(F) 0.003321
Log-likelihood 234.7652 Akaike criterion -457.5304
Schwarz criterion -442.8043 Hannan-Quinn -451.6038

Interpretation:-
In the above results coefficient value of Z is -0.0175839 and its p value is 0.46 which is greater
than level of significance 0.05 which means our null hypothesis will be accepted which is linear
model is good.

Ramsey Test:-

Auxiliary regression for RESET specification test

OLS, using observations 1-88

Dependent variable: ROA

coefficient std. error t-ratio p-value

-------------------------------------------------------

const -1.11598 0.644572 -1.731 0.0872 *

CA 0.264521 0.167591 1.578 0.1183

Lqdt 1.82669 0.995142 1.836 0.0700 *

Lvrg 1.04760 0.579967 1.806 0.0745 *

 Sz -0.0614385 0.0335161 -1.833 0.0704 *

yhat^2 86.0298 43.9253 1.959 0.0536 *

Test statistic: F = 3.835914,

with p-value = P(F(1,82) > 3.83591) = 0.0536

Interpreation:-

F calculated value is 3.84 and its p value is 0.053 which is greater than level of significance 0.05 which
means we may accept our null hypothesis and we have no specification problem.

Cube Only

Auxiliary regression for RESET specification test

OLS, using observations 1-88

Dependent variable: ROA

coefficient std. error t-ratio p-value

---------------------------------------------------------

const -0.245438 0.231017 -1.062 0.2912

CA 0.00940206 0.0739354 0.1272 0.8991

Lqdt 0.833278 0.550903 1.513 0.1342

Lvrg 0.372060 0.266685 1.395 0.1667

Sz -0.0280784 0.0186372 -1.507 0.1358

yhat^3 289.201 166.076 1.741 0.0854 *

Test statistic: F = 3.032399,

with p-value = P(F(1,82) > 3.0324) = 0.0854

Square and cube Only

Auxiliary regression for RESET specification test

OLS, using observations 1-88

Dependent variable: ROA

coefficient std. error t-ratio p-value

---------------------------------------------------------

const -15.5277 5.28357 -2.939 0.0043 ***

CA 4.63638 1.59986 2.898 0.0048 ***

Lqdt 17.1761 5.66991 3.029 0.0033 ***

Lvrg 11.8931 3.98791 2.982 0.0038 ***

Sz -0.576649 0.190332 -3.030 0.0033 ***

yhat^2 1592.04 549.940 2.895 0.0049 ***

yhat^3 -5684.16 2069.50 -2.747 0.0074 ***

Test statistic: F = 5.843024,

with p-value = P(F(2,81) > 5.84302) = 0.00426

P value is 0.00426 which is less than

JARQUE BERA Test

Test for normality of uhat8:

For normality of residual

Jarque-Bera test = 1182.28, with p-value 1.86984e-257

Interpreatiaon

The p value of jarque bera is less than 0.05 we may