Dougherty C12G05 2016 05 22

Type author name/s here
Dougherty
Introduction to Econometrics,
5th edition
Chapter heading
Chapter 12: Autocorrelation
© Christopher Dougherty, 2016. All rights reserved.

TESTS FOR AUTOCORRELATION III: EXAMPLES
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Dependent Variable: LGFOOD
Method: Least Squares
Sample: 1959 2003
Included observations: 45
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Variable Coefficient Std. Error t-Statistic Prob.
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C 2.236158 0.388193 5.760428 0.0000
LGDPI 0.500184 0.008793 56.88557 0.0000
LGPRFOOD -0.074681 0.072864 -1.024941 0.3113
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R-squared 0.992009 Mean dependent var 6.021331
Adjusted R-squared 0.991628 S.D. dependent var 0.222787
S.E. of regression 0.020384 Akaike info criter-4.883747
Sum squared resid 0.017452 Schwarz criterion -4.763303
Log likelihood 112.8843 Hannan-Quinn crite-4.838846
F-statistic 2606.860 Durbin-Watson stat 0.478540
Prob(F-statistic) 0.000000
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The output shown in the table gives the result of a logarithmic regression of expenditure on
food on disposable personal income and the relative price of food.
1
0.06
Residuals, static logarithmic regression for FOOD
0.05
0.04
0.03
0.02
0.01
0
1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003
-0.01
-0.02
-0.03
-0.04
The plot of the residuals is shown. All the tests indicate highly significant autocorrelation.
2
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Dependent Variable: RLGFOOD
Sample(adjusted): 1960 2003
Included observations: 44 after adjusting endpoints
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RLGFOOD(-1) 0.790169 0.106603 7.412228 0.0000
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R-squared 0.560960 Mean dependent var 3.28E-05
Log likelihood 127.9936 Durbin-Watson stat 1.477337
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uˆ t  0.79uˆ t 1
RLGFOOD in the regression above is the residual from the LGFOOD regression. A simple
regression of RLGFOOD on RLGFOOD(–1) yields a coefficient of 0.79 with standard error
0.11.
3
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RLGFOOD(-1) 0.790169 0.106603 7.412228 0.0000
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uˆ t  0.79uˆ t 1
Technical note for EViews users: EViews places the residuals from the most recent
regression in a pseudo-variable called resid. resid cannot be used directly. So the
residuals were saved as RLGFOOD using the genr command: genr RLGFOOD = resid
4
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C 0.175732 0.265081 0.662936 0.5112
LGDPI -7.36E-05 0.006180 -0.011917 0.9906
LGPRFOOD -0.037373 0.049496 -0.755058 0.4546
RLGFOOD(-1) 0.805744 0.110202 7.311504 0.0000
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Log likelihood 128.5543 F-statistic 17.81977
Durbin-Watson stat 1.513911 Prob(F-statistic) 0.000000
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nR 2  44  0.5720  25.17  2 1crit, 0.1%  10.83
Next, the Breusch‒Godfrey test. Adding an intercept, LGDPI and LGPRFOOD to the
specification, the coefficient of the lagged residuals becomes 0.81 with standard error 0.11.
R2 is 0.5720, so nR2 is 25.17.
5
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C 0.175732 0.265081 0.662936 0.5112
LGDPI -7.36E-05 0.006180 -0.011917 0.9906
LGPRFOOD -0.037373 0.049496 -0.755058 0.4546
RLGFOOD(-1) 0.805744 0.110202 7.311504 0.0000
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nR 2  44  0.5720  25.17  2 1crit, 0.1%  10.83
(Note that here n = 44. There are 45 observations in the regression in Table 12.1, and one
fewer in the residuals regression.) The critical value of chi-squared with one degree of
freedom at the 0.1 percent level is 10.83.
6
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Breusch-Godfrey Serial Correlation LM Test:
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F-statistic 54.78773 Probability 0.000000
Obs*R-squared 25.73866 Probability 0.000000
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Test Equation:
Dependent Variable: RESID
Presample missing value lagged residuals set to zero.
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============================================================
C 0.171665 0.258094 0.665124 0.5097
LGDPI 9.50E-05 0.005822 0.016324 0.9871
LGPRFOOD -0.036806 0.048504 -0.758819 0.4523
RESID(-1) 0.805773 0.108861 7.401873 0.0000
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R-squared 0.571970 Mean dependent var-1.85E-18
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Technical note for EViews users: one can perform the test simply by following the LGFOOD
regression with the command auto(1). EViews allows itself to use resid directly.
7
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Test Equation:
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C 0.171665 0.258094 0.665124 0.5097
LGDPI 9.50E-05 0.005822 0.016324 0.9871
LGPRFOOD -0.036806 0.048504 -0.758819 0.4523
RESID(-1) 0.805773 0.108861 7.401873 0.0000
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The argument in the auto command relates to the order of autocorrelation being tested. At
the moment we are concerned only with first-order autocorrelation. This is why the
command is auto(1).
8
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Test Equation:
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C 0.171665 0.258094 0.665124 0.5097
LGDPI 9.50E-05 0.005822 0.016324 0.9871
LGPRFOOD -0.036806 0.048504 -0.758819 0.4523
RESID(-1) 0.805773 0.108861 7.401873 0.0000
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When we performed the test, resid(–1), and hence RLGFOOD(–1), were not defined for
the first observation in the sample, so we had 44 observations from 1960 to 2003.
9
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Test Equation:
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C 0.171665 0.258094 0.665124 0.5097
LGDPI 9.50E-05 0.005822 0.016324 0.9871
LGPRFOOD -0.036806 0.048504 -0.758819 0.4523
RESID(-1) 0.805773 0.108861 7.401873 0.0000
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EViews uses the first observation by assigning a value of zero to the first observation for
resid(–1). Hence the test results are very slightly different.
10
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C 0.175732 0.265081 0.662936 0.5112
LGDPI -7.36E-05 0.006180 -0.011917 0.9906
LGPRFOOD -0.037373 0.049496 -0.755058 0.4546
RLGFOOD(-1) 0.805744 0.110202 7.311504 0.0000
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We can also perform the test with a t test on the coefficient of the lagged variable.
11
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Test Equation:
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C 0.171665 0.258094 0.665124 0.5097
LGDPI 9.50E-05 0.005822 0.016324 0.9871
LGPRFOOD -0.036806 0.048504 -0.758819 0.4523
RESID(-1) 0.805773 0.108861 7.401873 0.0000
============================================================
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Here is the corresponding output using the auto command built into EViews. The test is
presented as an F statistic. Of course, when there is only one lagged residual, the F
statistic is the square of the t statistic.
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Sample: 1959 2003
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C 2.236158 0.388193 5.760428 0.0000
LGDPI 0.500184 0.008793 56.88557 0.0000
LGPRFOOD -0.074681 0.072864 -1.024941 0.3113
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dL = 1.24 (1% level, 2 explanatory variables, 45 observations)
The Durbin–Watson statistic is 0.48. dL is 1.24 for a 1 percent significance test (2

explanatory variables, 45 observations).
13
Breusch–Godfrey test
k
Yt   1    j X jt  ut
j 2
k q
uˆ t   1    j X jt    s uˆ t  s
j2 s 1
Test statistic: nR2, distributed as c2(q)
Alternatively, F test on the lagged residuals

H0: r1 = ... = rq = 0, H1: not H0
The Breusch–Godfrey test for higher-order autocorrelation is a straightforward extension of

the first-order test. If we are testing for order q, we add q lagged residuals to the right side
of the residuals regression. We will perform the test for second-order autocorrelation.
14
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C 0.071220 0.277253 0.256879 0.7987
LGDPI 0.000251 0.006491 0.038704 0.9693
LGPRFOOD -0.015572 0.051617 -0.301695 0.7645
RLGFOOD(-1) 1.009693 0.163240 6.185318 0.0000
RLGFOOD(-2) -0.289159 0.171960 -1.681548 0.1009
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nR  43  0.6020  25.89
2 2
 2 
crit, 0.1%  13.82
Here is the regression for RLGFOOD with two lagged residuals. The Breusch–Godfrey test
statistic is 25.89. With two lagged residuals, the statistic has a chi-squared distribution
with two degrees of freedom under the null hypothesis. It is significant at the 0.1 percent
level 15
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C 0.071220 0.277253 0.256879 0.7987
LGDPI 0.000251 0.006491 0.038704 0.9693
LGPRFOOD -0.015572 0.051617 -0.301695 0.7645
RLGFOOD(-1) 1.009693 0.163240 6.185318 0.0000
RLGFOOD(-2) -0.289159 0.171960 -1.681548 0.1009
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We will also perform an F test, comparing the RSS with the RSS for the same regression
without the lagged residuals. We know the result, because one of the t statistics is very
high.
16
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Sample: 1961 2003
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C 0.027475 0.412043 0.066680 0.9472
LGDPI -0.001074 0.009986 -0.107528 0.9149
LGPRFOOD -0.003948 0.076191 -0.051816 0.9589
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Adjusted R-squared -0.049687 S.D. dependent var 0.020368
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Here is the regression for ELGFOOD without the lagged residuals. Note that the sample
period has been adjusted to 1961 to 2003, to make RSS comparable with that for the
previous regression.
17
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Sample: 1961 2003
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C 0.027475 0.412043 0.066680 0.9472
LGDPI -0.001074 0.009986 -0.107528 0.9149
LGPRFOOD -0.003948 0.076191 -0.051816 0.9589
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Adjusted R-squared -0.049687 S.D. dependent var 0.020368
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0.017419  0.006935 / 2
F 2,38    28.72 F 2,35 crit, 0.1%  8.47
0.006935 / 38
The F statistic is 28.72. This is significant at the 1% level. The critical value for F(2,35) is
8.47. That for F(2,38) must be slightly lower.
18
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Test Equation:
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C 0.053628 0.261016 0.205460 0.8383
LGDPI 0.000920 0.005705 0.161312 0.8727
LGPRFOOD -0.013011 0.049304 -0.263900 0.7932
RESID(-1) 1.011261 0.159144 6.354360 0.0000
RESID(-2) -0.290831 0.167642 -1.734833 0.0905
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Here is the output using the auto(2) command in EViews. The conclusions for the two
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tests are the same.
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Sample (adjusted): 1960 2003
Included observations: 44 after adjustments
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C 0.985780 0.336094 2.933054 0.0055
LGDPI 0.126657 0.056496 2.241872 0.0306
LGPRFOOD -0.088073 0.051897 -1.697061 0.0975
LGFOOD(-1) 0.732923 0.110178 6.652153 0.0000
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The output above gives the result of a parallel logarithmic regression with the addition of
lagged expenditure on food as an explanatory variable. Again, there is strong evidence that
the specification is subject to autocorrelation.
20
0.04
Residuals, ADL(1,0) logarithmic regression for FOOD
0.03
0.02
0.01
0
1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003
-0.01
-0.02
-0.03
Here is a plot of the residuals.
21
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RLGFOOD(-1) 0.431010 0.143277 3.008226 0.0044
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uˆ t  0.43uˆ t 1
A simple regression of the residuals on the lagged residuals yields a coefficient of 0.43 with
standard error 0.14. We expect the estimate to be adversely affected by the presence of the
lagged dependent variable in the regression for LGFOOD.
22
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C 0.417342 0.317973 1.312507 0.1972
LGDPI 0.108353 0.059784 1.812418 0.0778
LGPRFOOD -0.005585 0.046434 -0.120279 0.9049
LGFOOD(-1) -0.214252 0.116145 -1.844700 0.0729
RLGFOOD(-1) 0.604346 0.172040 3.512826 0.0012
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With an intercept, LGDPI, LGPRFOOD, and LGFOOD(–1) added to the specification, the
coefficient of the lagged residuals becomes 0.60 with standard error 0.17.
23
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C 0.417342 0.317973 1.312507 0.1972
LGDPI 0.108353 0.059784 1.812418 0.0778
LGPRFOOD -0.005585 0.046434 -0.120279 0.9049
LGFOOD(-1) -0.214252 0.116145 -1.844700 0.0729
RLGFOOD(-1) 0.604346 0.172040 3.512826 0.0012
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nR  43  0.2469  10.62
2 2
 1
crit, 0.1%  10.83
R2 is 0.2469, so nR2 is 10.62, significant at the 1 percent level and nearly significant at the
0.1 percent level. (Note that here n = 43.) The t statistic for the coefficient of the lagged
residual is also highly significant.
23
Copyright Christopher Dougherty 2016.
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Introduction to Econometrics, fifth edition 2016, Oxford University Press.
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2016.05.22

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nR 2  44  0.5720  25.17  2 1crit, 0.1%  10.83

nR 2  44  0.5720  25.17  2 1crit, 0.1%  10.83

dL = 1.24 (1% level, 2 explanatory variables, 45 observations)

The Durbin–Watson statistic is 0.48. dL is 1.24 for a 1 percent significance test (2

Test statistic: nR2, distributed as c2(q)

Alternatively, F test on the lagged residuals

The Breusch–Godfrey test for higher-order autocorrelation is a straightforward extension of

Here is a plot of the residuals.

These slideshows may be downloaded by anyone, anywhere for personal use.

The content of this slideshow comes from Section 12.2 of C. Dougherty,

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