1

ESEE2102 Tutorial 7 2012/2013 Sem. 1

Solution:

1. Heteroscedasticity means that the variance of the error term in a regression
model does not remain constant between observations.
a) The OLS estimators are still unbiased but they are no longer efficient.
b) Since the estimated standard errors of OLS estimators may be biased, the
resulting t ratios are likely to be biased too. As a result, the usual confidence
intervals, hypothesis testing procedure, etc. are likely to be of questionable
value.

2. a)

Dependent Variable: RDEXP
Method: Least Squares

Sample: 1 18
Included observations: 18


Variable Coefficient Std. Error t-Statistic Prob.


C 77.57695 983.6063 0.078870 0.9381
PROFITS 0.361402 0.090790 3.980644 0.0011


b) -



There seems to be some evidence of heteroscedasticity.

c) (i) Goldfeld-Quandt test:
- Arrange the data set in ascending order for profits variable.
- Take out r observations in the middle part (in this case we use r = 1/3 of
sample size which is equal to 6 observations).
- Produce separate regression for n
1
observations and n
2
observations.




-8000
-6000
-4000
-2000
0
2000
4000
6000
8000
0.0 5000.0 10000.0 15000.0 20000.0 25000.0
r
e
s
i
d
u
a
l
s

X (profits)
2
2
2
2
1 0
: o o = H
2
2
2
1 1
: o o = H

Test statistic:
( )
( )
94 . 89
1 1 6 / 1087127
1 1 6 / 97773246
1 /
1 /
1 1
2 2
=


=


=
k n SSE
k n SSE
GQ

Critical value: 39 . 6
4 , 4 , 05 . 0
= F

Decision: 39 . 6 94 . 89
4 , 4 , 05 . 0
= > = F GQ , reject the null hypothesis. Regression
suffers from the heteroscedasticity problem.


(ii) White test:

Auxiliary regression:

( ) ( )
t i
w e + + + =
2
2 1 0
2
profits profits o o o

0 :
2 1 0
= = o o H
:
1
H At least one 0 =
i
o

Test statistic: ( ) 0267 . 14 779262 . 0 18
2
= = nR

Critical value: 99 . 5
2
2 , 05 . 0
= _

Decision: 99 . 5 0267 . 14
2
2 , 05 . 0
2
= > = _ nR , reject the null hypothesis.
Regression suffers from the heteroscedasticity problem.


d) Based on part (b), it seems that in the regression of R&D on profits, the
variance of the error term seems proportional to profits. Therefore, regress
(R&D/ Profits ) on (1/ Profits ) and Profits . The results of this
regression are:
i
|
.
|

\
|
Profits
D & R
= -22.0242
i
|
.
|

\
|
Profits
1
+ 0.3735
i
) Profits (

e)
2
2
2
1 0
: o o = H
2
2
2
1 1
: o o = H

Test statistic:
( )
( )
31 . 11
2 6 / 93 . 438
2 6 / 97 . 4965
/
/
1 1
2 2
=

=
k n SSE
k n SSE
GQ

Critical value: 39 . 6
4 , 4 , 05 . 0
= F

3
Decision: 39 . 6 31 . 11
4 , 4 , 05 . 0
= > = F GQ , reject the null hypothesis. Regression
suffers from the heteroscedasticity problem. However, we managed to lessen
the heteroscedasticity problem which can be seen in the reduction of test
statistic from 89.94 to 11.31.


3. a)

Dependent Variable: LOG(RDEXP)
Method: Least Squares

Sample: 1 18
Included observations: 18


Variable Coefficient Std. Error t-Statistic Prob.


C -1.255122 1.364763 -0.919663 0.3714
LOG(PROFITS) 0.990958 0.159722 6.204265 0.0000




b) Auxiliary regression:

( ) ( )
t i
w e + + + =
2
2 1 0
2
profits ln profits ln o o o

0 :
2 1 0
= = o o H
:
1
H At least one 0 =
i
o

Test statistic: ( ) 7801 . 0 043339 . 0 18
2
= = nR

Critical value: 99 . 5
2
2 , 05 . 0
= _

Decision: 99 . 5 7801 . 0
2
2 , 05 . 0
2
= < = _ nR , do not reject the null hypothesis.
Regression doesnt suffer from the heteroscedasticity problem.


4.
Dependent Variable: CONSUMPTION
Method: Least Squares

Sample: 1 30
Included observations: 30


Variable Coefficient Std. Error t-Statistic Prob.


C 16222.97 5436.061 2.984324 0.0060
INCOME 0.641166 0.166878 3.842131 0.0007
WEALTH 0.148788 0.041327 3.600281 0.0013


Auxiliary regression:

( ) ( ) ( ) ( )
( )
t
i
w
e
+ +
+ + + + =
wealth * income
wealth income wealth income
5
2
4
2
3 2 1 0
2
o
o o o o o


4
0 :
5 4 3 2 1 0
= = = = = o o o o o H
:
1
H At least one 0 =
i
o

Test statistic: ( ) 8190 . 2 093967 . 0 30
2
= = nR

Critical value: 07 . 11
2
5 , 05 . 0
= _

Decision: 07 . 11 8190 . 2
2
5 , 05 . 0
2
= < = _ nR , do not reject the null hypothesis.
Regression doesnt suffer from the heteroscedasticity problem.