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observations.
(2) Define the population correlation coefficient and explain why it is bounded by
the values 1 and +1.
(3) Assume we have a two-asset portfolio, where the return on the portfolio, RP, is
the sum of the product of the return on each asset, R 1 and R2, multiplied their
proportionate share (weight) in the portfolio, W1 and W2, respectively. That is:
RP = W1R1 + W2R2,
Where, W1 + W2 = 1.
State whether the following statements are true, false, or uncertain. Justify
your answers.1
(a)
(b)
(2)
The following random sample was obtained from a normal population with
mean and variance = 2.
8, 9, 6, 13, 11, 8, 12, 5, 4, 14
(a)
(b)
(3)
(4)
A type II error occurs when we reject the null hypothesis even though it
may be true.
As the degrees of freedom increase indefinitely, the t distribution
approaches the normal distribution.
In a random sample of rents (X, in s per week) for superior rooms in a leafy
suburb of London the following information was gathered:
n = 40
(a)
(b)
(c)
(d)
( X i X ) 2 = 5900
Xi = 7200
Construct a 95% and 99% confidence interval for the mean value of rents.
Test the hypothesis, at the 5% and 1% levels, that the true mean is 175.5.
Use both a one tailed (greater than) and 2 tailed test. Comment on the
inference drawn.
Why would a larger sample be useful?
Explain why the t table was needed.
(a)
(5.1.1)
(c)
Specify the stochastic model that can be estimated from a sample of data,
called the stochastic Sample Regression Function (SRF).
(d)
(e)
(1)
Showing all the steps of your derivation, derive OLS estimators 1 and 2 for
the following two-variable SRF:
= 1 + 2 +
(7.1.1)
(8.1.1)
where denotes the natural logarithm of the exchange rate between two
countries (number of units of foreign currency per US $) and is the natural
logarithm of the ratio of the foreign price to the domestic (USA) price.
Summary statistics of the data are given below for three country pairings:
Canada and the USA (denoted Canada), Denmark and the USA (Denmark) and
Japan and the USA (Japan).
Canada
2
2
2
2
0.072624, =1 = 0.09434, =1 = 0.08353, =1 = 0.54685.
Denmark
2
2
2
2
0.24558,
=1 = 0.07825, =1 = 0.25668, =1 = 1.04697.
Japan
2
2
= 35, = 5.13374, = 0.25906,
=1 = 5.81281, =1 = 1.43787,
2
2
(a)
(8.1.2)
2 = =1
2
(8.1.3)
=1
where, =
=1
, =
=1
, = and = .
(b)
(c)
Theory suggests that an increase in the relative price should raise the
exchange rate. Given this theoretical expectation, comment on whether
Specify the formula for the regression standard error (), numerically
calculate it and interpret the result for all 3 country parings.
(e)
1 = 2 ( =1
2
=1
2 = 2 (
2
=1
(2)
(8.1.4)
(8.1.5)
(8.2.1)
where denotes USA total real consumer personal expenditure and is USA
real personal disposable income (both measured in $billions with 2009 as the
base year).
You are given the following annual data on these series from 2010 2013.
Ct
2010
2011
2012
2013
3309.2
3414.7
3515.8
3641.6
Yt
11055.1
11331.2
11676.2
11650.8
(a)
(b)
(c)
$10000 billion
$12000 billion
Calculate , 1 and 2 .
Showing all the steps of your derivation, demonstrate that the OLS estimator
for the slope coefficient, 2, in the SRF given by (10.2.1) is unbiased given that
the assumptions about the LRM hold. Clearly state the assumptions that are
used in your derivation.
= 1 + 2 +
(12.1.1a)
(1)
where denotes the natural logarithm of the exchange rate between two countries
(number of units of foreign currency per US $), 2 is the natural logarithm of the
foreign price and 3 is the natural logarithm of the domestic (USA) price.
Summary statistics of the data are given below for three country pairings: Canada
and the USA (denoted Canada), Denmark and the USA (Denmark) and Japan and the
USA (Japan).
Canada
2
= 35, = 0.21224, 2 = 4.09883, 3 = 4.08118,
=1 = 0.66939,
2
2
=1 3 = 2.03196, =1 2 3 = 8.89466,
=1 = 0.17165.
Denmark
2
= 35, = 1.90136, 2 = 4.06337, 3 = 4.08118,
=1 = 1.07190,
2
Japan
2
= 35, = 5.13374, 2 = 4.34024, 3 = 4.08118,
=1 = 5.81281,
2
(a)
Use the following formula to produce coefficient estimates of (1) for all 3
country parings:
1 = 2 2 3 3
(2)
=1 3 =1 2 3 =1 3
2 = =1 2
2
(3)
=1 2 =1 3 (=1 2 3 )
=1 2 =1 2 3 =1 2
3 = =1 3
2
(4)
=1 2 =1 3 (=1 2 3 )
where, = =1
, 2 =
3 = 3 3.
=1 2
, 3 =
=1 3
, = , 2 = 2 2 and
(b)
Interpret the coefficients estimated in (a) in terms of their marginal effects for
all 3 country pairings.
(c)
Theory suggests that an increase in the foreign price should raise the exchange
rate and a rise in the domestic price should reduce the exchange rate. Given
these theoretical expectations comment on whether the coefficients estimated
in (a) are consistent with economic theory for all 3 country pairings.
(d)
Specify the formula for the regression standard error (), numerically calculate
it and interpret the result for all 3 country parings.
(e)
1 = +
2
2
2
22
=1 3 +3 =1 2 22 3 =1 2 3
2
=1 2 =1 3 (=1 2 3 )
=1 3
2
2
=1 2 =1 3 (
=1 2 3 )
2 =
3 =
=1 2
=1 2 =1 3 (=1 2 3 )
(5)
(6)
(7)
Econometrics exercises 15 and 17: hypothesis testing and fit in the K-variable LRM
An econometrician is analysing the following population regression function:
= 1 + 2 2 + 3 3 +
(1)
where denotes the natural logarithm of the exchange rate between two countries,
2 is the natural logarithm of the foreign price and 3 is the natural logarithm of
the domestic (USA) price.
The table below summarises estimation results for three country pairings: Canada
and the USA (denoted Canada), Denmark and the USA (Denmark) and Japan and the
USA (Japan).
1
2
3
RSS
TSS
N
Canada
-0.857380
(0.125851)
-0.406750
(0.339787)
0.670598
(0.359609)
0.171645
0.669394
35
Denmark
2.016043
(0.407449)
0.436806
(0.571783)
-0.463000
(0.649971)
1.044620
1.071901
35
Japan
7.765857
(0.469544)
0.304484
(0.245288)
-0.968750
(0.167731)
0.763833
5.812811
35
(16.1.1b)
Defining the variables and coefficients as: Yt = lnEt, Xt = ln(FPt / Pt), = , and =
, this can be re-expressed using the following standard two-variable LRM form:
Relative price form:
(16.1.1b)
When you first open EViews you can select the Create a new EViews workfile option that
automatically appears on the screen and then browse for the file that you wish to open.
10
Coefficient
Std. Error
t-Statistic
Prob.
C
LRPA
0.465626
0.670174
0.034621
0.108971
13.44909
6.150034
0.0000
0.0000
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.621853
0.605412
0.123837
0.352719
17.78853
37.82292
0.000003
0.614403
0.197142
-1.263082
-1.165572
-1.236037
0.612162
(4) To save the equation as an object click on the Object button (the third button
from the left at the top of the dialog box), select Name from the menu that
appears, type in the name of the equation in the area below the title Name to
identify object as ppp_2_lrm and click on the OK button.
(5) To close the dialog box with the estimation results click on the situated at the
top right of the equation objects dialog box. An equation object should now
appear in the workfile as = ppp_2_lrm.
(6) To estimate the 3-variable regression, (16.1.1b), double click on the equation
object, = ppp_2_lrm.
(7) Click on the Object button and select Copy object from the menu that
appears. In the new object dialog box that appears click on the Object button,
select Name from the menu that appears, type in the name of the equation in
the area below the title Name to identify object as ppp_3_lrm and click on the
OK button.
(8) Click on the Estimate button situated as seventh from the left on the menu bar
at the top of the object dialog box. Type the equation to be estimated as LEA C
LCPA LCPU in the large blank area in the dialog box that appears and click on the
OK button.
(9) The following output should have appeared on the screen.
(10) This output can be added to the Word file by highlighting and copying the
output to be saved and pasting it into Word. Return to EViews (for example,
3
11
Coefficient
Std. Error
t-Statistic
Prob.
C
LCPA
LCPU
0.937511
0.375168
-0.478546
1.040684
0.659616
0.436688
0.900860
0.568767
-1.095853
0.3774
0.5753
0.2850
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.625358
0.591300
0.126032
0.349449
17.90494
18.36139
0.000020
0.614403
0.197142
-1.192395
-1.046130
-1.151828
0.622585
(11) To close both of the dialog boxes containing the estimation results click on the
situated at the top right of both of the equation objects dialog boxes. Another
equation object should appear in the workfile as = ppp_3_lrm.
(12) To save the updated workfile click on the Save option at the top of the workfile
object box.
(13) To exit E-Views, click on the File menu, choose Exit and click on OK when told
that all unsaved data will be lost (you have already saved your data in
Exercise_16_EC5002_PPP_data.wf1).
16.4 Saving the E-Views results (computer output) in a Word file
(1) To save the EViews computer output that you pasted in to the Word document
Exercise_16_EC5002 click on the File menu, choose the Save As option and
select the Word Document option in the Save as type: area, type in the name of
the document as Exercise_16_EC5002 and navigate to the drive where you want
to save the file. Click on Save.
(2) Exit Word (shut down Excel if necessary) and shut down the computer.
12
Coefficient
Std. Error
t-Statistic
Prob.
C
LRPA
0.465626
0.670174
0.034621
0.108971
13.44909
6.150034
0.0000
0.0000
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.621853
0.605412
0.123837
0.352719
17.78853
37.82292
0.000003
0.614403
0.197142
-1.263082
-1.165572
-1.236037
0.612162
(3) This output can be saved in a Word file in the following way. Highlight the
4
When you first open EViews you can select the Open an existing EViews file option that
automatically appears on the screen and then browse for the file that you wish to open.
5
Do not worry if there are minor discrepancies with your results.
13
output to be saved (highlight all of the output) and copy this to the clipboard
(for example, use the Edit and Copy menus). Go to the desktop, open the Word
program and paste the output into Word (for example, use the Edit and Paste
menus). Return to EViews (for example, click on the EViews button at the
bottom of the screen).
19.3 Testing the estimated LRM for 1st-order autocorrelation using the BreuschGodfrey test
(1) To test the estimated PPP LRM for 1storder autocorrelation, click on the View
menu, select the option Residual Tests and then choose Serial Correlation LM
Test. When prompted to specify the Lags to include type 1 and click on the OK
button.
(2) This output can be added to the Word file by highlighting and copying the
output to be saved and pasting it into Word. Return to EViews (for example,
click on the EViews button at the bottom of the screen). The following output
should have appeared on the screen.6 Is there evidence of first-order
autocorrelation?
Breusch-Godfrey Serial Correlation LM Test:
F-statistic
Obs*R-squared
19.77152
11.83313
Prob. F(1,22)
Prob. Chi-Square(1)
0.0002
0.0006
Test Equation:
Dependent Variable: RESID
Method: Least Squares
Sample: 1970 1994
Included observations: 25
Presample missing value lagged residuals set to zero.
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
LRPA
RESID(-1)
-0.002141
0.005485
0.689207
0.025695
0.080869
0.154999
-0.083321
0.067825
4.446518
0.9343
0.9465
0.0002
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.473325
0.425446
0.091891
0.185768
25.80319
9.885761
0.000865
14
7.05E-17
0.121230
-1.824255
-1.677990
-1.783687
1.268535
19.4 Testing the estimated LRM for 2nd-order autocorrelation using the BreuschGodfrey test
(1) To test the estimated PPP LRM for 2ndorder autocorrelation, click on the View
menu, select the option Residual Tests and then choose Serial Correlation LM
Test. When prompted to specify the Lags to include type 2 and click on the OK
button. Is there evidence of second-order autocorrelation?
Breusch-Godfrey Serial Correlation LM Test:
F-statistic
Obs*R-squared
16.76415
15.37197
Prob. F(2,21)
Prob. Chi-Square(2)
0.0000
0.0005
Test Equation:
Dependent Variable: RESID
Method: Least Squares
Sample: 1970 1994
Included observations: 25
Presample missing value lagged residuals set to zero.
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
LRPA
RESID(-1)
RESID(-2)
0.001521
-0.005002
1.045375
-0.521439
0.022528
0.070881
0.186652
0.187686
0.067500
-0.070568
5.600651
-2.778250
0.9468
0.9444
0.0000
0.0113
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.614879
0.559862
0.080427
0.135839
29.71600
11.17610
0.000136
7.05E-17
0.121230
-2.057280
-1.862260
-2.003190
2.278805
(2) To save the output that appears on the screen (above) in Word, highlight and
copy the output to be saved and paste it into Word. Return to EViews (for
example, click on the EViews button at the bottom of the screen).
(3) To close the dialog box containing the estimation results click on the situated
at the top right of the equation objects dialog box.
output to be saved and pasting it into Word. Return to EViews (for example,
click on the EViews button at the bottom of the screen).
Dependent Variable: LEA
Method: Least Squares
Sample (adjusted): 1972 1994
Included observations: 23 after adjustments
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
LRPA
LRPA(-1)
LRPA(-2)
LEA(-1)
LEA(-2)
0.227545
-0.048926
0.660527
-0.304550
1.089954
-0.569411
0.077462
0.777823
1.229136
0.694393
0.200017
0.201803
2.937500
-0.062902
0.537392
-0.438585
5.449296
-2.821616
0.0092
0.9506
0.5980
0.6665
0.0000
0.0118
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.845040
0.799463
0.084044
0.120076
27.79831
18.54109
0.000002
0.590984
0.187675
-1.895506
-1.599290
-1.821008
2.079239
0.308463
0.435029
Prob. F(1,16)
Prob. Chi-Square(1)
0.5863
0.5095
Test Equation:
Dependent Variable: RESID
Method: Least Squares
Sample: 1972 1994
Included observations: 23
Presample missing value lagged residuals set to zero.
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
LRPA
LRPA(-1)
LRPA(-2)
LEA(-1)
LEA(-2)
RESID(-1)
-0.030439
0.189730
-0.389966
0.167270
0.177906
-0.114000
-0.279803
0.096221
0.864501
1.437999
0.770281
0.379882
0.290831
0.503792
-0.316343
0.219468
-0.271186
0.217154
0.468319
-0.391980
-0.555395
0.7558
0.8291
0.7897
0.8308
0.6459
0.7002
0.5863
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.018914
-0.348993
0.085807
0.117805
28.01791
0.051411
0.999265
16
-2.55E-16
0.073878
-1.827645
-1.482059
-1.740731
1.932099
(1) To test the estimated ADL PPP LRM for 1storder autocorrelation, click on the
View menu, select the option Residual Tests and then choose Serial Correlation
LM Test. When prompted to specify the Lags to include type 1 and click on the
OK button.
(2) This output (above) can be added to the Word file by highlighting and copying
the output to be saved and pasting it into Word. Return to EViews (for example,
click on the EViews button at the bottom of the screen). Does this model exhibit
evident first-order autocorrelation?
(3) To test the estimated PPP LRM for 2ndorder autocorrelation, click on the View
menu, select the option Residual Tests and then choose Serial Correlation LM
Test. When prompted to specify the Lags to include type 2 and click on the OK
button.
(4) To save the output (below) that appears on the screen in Word, highlight and
copy the output to be saved and paste it into Word. Return to EViews (for
example, click on the EViews button at the bottom of the screen). Does this
model exhibit evident second-order autocorrelation?
Breusch-Godfrey Serial Correlation LM Test:
F-statistic
Obs*R-squared
0.822988
2.274269
Prob. F(2,15)
Prob. Chi-Square(2)
0.4580
0.3207
Test Equation:
Dependent Variable: RESID
Method: Least Squares
Sample: 1972 1994
Included observations: 23
Presample missing value lagged residuals set to zero.
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
LRPA
LRPA(-1)
LRPA(-2)
LEA(-1)
LEA(-2)
RESID(-1)
RESID(-2)
0.090416
0.189239
-0.611346
0.539448
-0.107589
-0.096862
0.023231
0.518455
0.141575
0.855692
1.436221
0.827866
0.450129
0.288250
0.563602
0.449367
0.638645
0.221153
-0.425663
0.651613
-0.239019
-0.336033
0.041220
1.153745
0.5327
0.8280
0.6764
0.5245
0.8143
0.7415
0.9677
0.2667
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.098881
-0.321641
0.084933
0.108203
28.99567
0.235139
0.969672
-2.55E-16
0.073878
-1.825711
-1.430756
-1.726381
1.946445
17
View menu, select the option Coefficient Diagnostics and then choose
Redundant Variables Test Likelihood Ratio. When prompted to specify the
variables to be deleted from the model type LRPA LRPA(2) in the OmittedRedundant Variable Test dialog box and then click the OK button.
(2) To save the output that appears on the screen (below) in Word, highlight and
copy the output to be saved and paste it into Word. Return to EViews (for
example, click on the EViews button at the bottom of the screen). Are the
variables LRPA and LRPA(-2) jointly insignificant? In the Restricted Test Equation
(that reports the ADL(2, 2) model with LRPA and LRPA(-2) excluded) reported in
the output below are there any further variables that might be considered for
deletion from the model?
(3) To close the dialog box containing the estimation results click on the situated
at the top right of the equation objects dialog box.
Redundant Variables Test
Equation: PPP_ADL_LEVELS_GEN
Specification: LEA C LRPA LRPA(-1) LRPA(-2) LEA(-1) LEA(-2)
Redundant Variables: LRPA LRPA(-2)
F-statistic
Likelihood ratio
Value
0.105152
0.282782
df
(2, 17)
2
Probability
0.9008
0.8681
Sum of Sq.
0.001485
0.121562
0.120076
0.120076
df
2
19
17
17
Mean
Squares
0.000743
0.006398
0.007063
0.007063
Value
27.65692
27.79831
df
19
17
F-test summary:
Test SSR
Restricted SSR
Unrestricted SSR
Unrestricted SSR
LR test summary:
Restricted LogL
Unrestricted LogL
Coefficient
Std. Error
t-Statistic
Prob.
C
LRPA(-1)
LEA(-1)
LEA(-2)
0.226558
0.293964
1.100390
-0.586239
0.073589
0.129579
0.186584
0.183547
3.078704
2.268608
5.897564
-3.193952
0.0062
0.0351
0.0000
0.0048
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.843123
0.818353
0.079987
0.121562
27.65692
34.03790
0.000000
18
0.590984
0.187675
-2.057124
-1.859646
-2.007459
2.181380
Coefficient
Std. Error
t-Statistic
Prob.
C
LRPA(-1)
LEA(-1)
LEA(-2)
0.226558
0.293964
1.100390
-0.586239
0.073589
0.129579
0.186584
0.183547
3.078704
2.268608
5.897564
-3.193952
0.0062
0.0351
0.0000
0.0048
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.843123
0.818353
0.079987
0.121562
27.65692
34.03790
0.000000
0.590984
0.187675
-2.057124
-1.859646
-2.007459
2.181380
19
1.061349
1.280656
Prob. F(1,18)
Prob. Chi-Square(1)
0.3166
0.2578
Test Equation:
Dependent Variable: RESID
Method: Least Squares
Sample: 1972 1994
Included observations: 23
Presample missing value lagged residuals set to zero.
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
LRPA(-1)
LEA(-1)
LEA(-2)
RESID(-1)
-0.046741
-0.059805
0.288000
-0.187447
-0.441727
0.086350
0.141798
0.335933
0.258237
0.428770
-0.541299
-0.421762
0.857313
-0.725872
-1.030218
0.5949
0.6782
0.4025
0.4772
0.3166
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.055681
-0.154168
0.079859
0.114793
28.31577
0.265337
0.896369
-4.65E-17
0.074334
-2.027458
-1.780612
-1.965377
1.874221
(3) To test the estimated PPP LRM for 2ndorder autocorrelation, click on the View
menu, select the option Residual Tests and then choose Serial Correlation LM
Test. When prompted to specify the Lags to include type 2 and click on the OK
button.
(4) To save the output that appears on the screen in Word, highlight and copy the
output to be saved and paste it into Word. Return to EViews (for example, click
on the EViews button at the bottom of the screen). Does this model exhibit
evident second-order autocorrelation?
(5) To close the regression / test output view click on the situated at the top right
of the equation object box (do not click on the situated at the top right of the
screen as this will initiate the closure of E-Views).
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0.703920
1.759050
Prob. F(2,17)
Prob. Chi-Square(2)
0.5085
0.4150
Test Equation:
Dependent Variable: RESID
Method: Least Squares
Sample: 1972 1994
Included observations: 23
Presample missing value lagged residuals set to zero.
Variable
Coefficient
Std. Error
t-Statistic
Prob.
C
LRPA(-1)
LEA(-1)
LEA(-2)
RESID(-1)
RESID(-2)
0.020435
0.031380
0.102049
-0.143274
-0.226462
0.255416
0.139667
0.206245
0.455156
0.272305
0.558031
0.412778
0.146310
0.152152
0.224207
-0.526154
-0.405824
0.618772
0.8854
0.8809
0.8253
0.6056
0.6899
0.5443
R-squared
Adjusted R-squared
S.E. of regression
Sum squared resid
Log likelihood
F-statistic
Prob(F-statistic)
0.076480
-0.195143
0.081264
0.112265
28.57190
0.281568
0.916806
-4.65E-17
0.074334
-1.962774
-1.666558
-1.888277
1.854927
Save the updated Eviews workfile by clicking on the Save menu at the top of
the workfile dialog box and exit EViews.
Save the updated Word file containing the computer output produced and
close Word.
Logoff and/or shutdown the computer.
21
(1)
(a) Prove that the two expressions for the Durbin-Watson d-statistic (given
below) are approximately equivalent. State any necessary assumptions.
T
d = (et - et-1)
t=2
/ et2
t=1
2(1 - )
^
where et is the residual from the estimated LRM and is the estimated
autocorrelation coefficient.
(b) Using your answer to Question 1a specify the values of d that correspond
to the estimated value of being 1, 0 and 1.
(d) The following model is estimated where coefficient standard errors are
specified in brackets and standard statistics are given (T is the sample size):
^
Yt = 0.674 + 0.996X2t + 0.136X3t
(0.311) (0.442) (0.097)
R2 = 0.341, AdjR2 = 0.225, s = 0.1993, d = 2.403, T = 60.
Test whether the model features statistically significant first-order
autocorrelation at the 5% level. Discuss the inference that you would
draw.
22
(b) Why is the first observation of the residual series used in Question 2a set
equal to zero?
(c) The estimated residuals, et, are collected from the model estimated in
Question 1(a) and the two values preceding the first observation of the
sample are set equal to zero. Using this residual series, the following
auxiliary regression is estimated over the full sample of 60 observations:
et = 0.011 + 0.025X2t + 0.017X3t 0.030et-1 + 0.004et-2 + vt
(0.062) (0.036) (0.035) (0.012)
(0.010)
R2 = 0.096, AdjR2 = 0.057, s = 0.0113, d = 1.897, T = 60.
Use the Breusch-Godfrey LM test to determine whether there is evidence
of statistically significant autocorrelation at the 5% level.
(d) Why are the first two values of the residual series set equal to zero?
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Yt X t ut
(22.1.1)
ut ut 1 vt
(22.1.2)
where, E (vt ) 0 , E (vt2 ) v2 , and E (vt vt i ) 0 . That is, vt is white noise (in
particular, non-autocorrelated).
By applying the Generalised Least Squares (GLS) estimator show that it produces BLU
coefficient estimates.
(2)
Show that the following two-variable LRM with AR(1) error process is
equivalent to an ADL(1, 1) model assuming the common factor restriction holds
and specify the appropriate common factor restriction.
Yt X t ut
(23.2.1)
ut ut 1 vt
(23.2.2)
Based upon this result comment on whether the ADL(1, 1) model or twovariable LRM with AR(1) error process is more general.
24