ECONOMETRICS ASSIGNMENT

SUBMITTED TO BY DR. P.SIVAKUMAR DUBEY

SUBMITTED RISHISH RBA-231

AUTOCORRELATION NATURE OF PROBLEM

In the question data from year 1950 to 1991 is given. The data gives information about inventories and sales in U.S. Manufacturing. The sales annual data is average of monthly while the inventories data is seasonally adjusted. We have to check whether there is existence of autocorrelation in the independent term. Sales are independent factor in this case. For checking the existence of autocorrelation we will use Durban-Watson statistics. We will run linear regression on the following model and obtain Durban-Watson statistics: Yt = B1 + B2Xt + u where, Y inventories X sales

DURBAN-WATSON TEST
On running the regression the value of Durban-Watson statistic is obtained as 1.375. As this value lies between 0 and 1.5, there is existence of positive autocorrelation. In order to overcome the problem of autocorrelation, either we can take the lag value of dependent variable keeping same independent variable in our model and then obtain Durban-Watson statistic or we can do the differencing of independent variable and take that as the independent variable in our model. 1-

DIFFERENCING METHOD

On running the regression model the Durban-Watson statistic obtained has the value of .364 and as this value is less than 1.5 so we can say there is positive autocorrelation in sales data. So we have to try second test. 2-

LAG VALUE METHOD

On running the regression model the Durban-Watson statistic obtained has

the value of 1.531 and as this value lies between 1.5 and 2.5 thus we can say there is no significant autocorrelation now.

HETEROSCEDASTICITY NATURE OF PROBLEM

The problem deals with the data on 81 cars. We have to check the data for existence of heteroscedasticity. Different variables given in the data are: MPG Average miles per gallon HP Engine Horsepower VOL Cubic feet of cabin space SP Top speed (mph) WT Vehicle weight in 100 lb The model that has to be tested is as follows: MPG = B1 + B2SP + B3HP + B4WT

EXISTENCE OF HETEROSCEDASTICITY
We can check for the existence of heteroscedasticity by any of the 4 methods: 1- Park test 2- Glejser test 3- Spearman rank test 4- Goldfield quant test

1-

Park test

In Park test, we have to obtain standardised residue for each independent

variable denoted by 'u. Then we have to run the regression for model: ln u2 = f(ln X) Then we have to check the significance of coefficient of ln X. Here first we will take independent variable SP. We will run regression on the model: ln uSP2 = f(ln SP) the t- value obtained for coefficient of SP is 0.057, which is not significant. Thus there is no heteroscedasticity in the top speed data of different cars. Running regression on the variable HP: ln uHP2 = f(ln HP) the t-value obtained for coefficient of HP is 1.189, which is not significant. Thus there is no heteroscedasticity in the horsepower data of different cars. Now, running regression on variable WT: ln uWT2 = f(ln WT) the t-value obtained for coefficient of WT is 2.563, which is significant. Thus there is existence of heteroscedasticity in the weight of vehicle. That means the data is not equally spread in case of vehicle weight. 2- Glejser test In Glejser test also we have to obtain the standardised residue for each independent variable and then run regression on model: |u| = f(X) Then significance of coefficient of X is checked. Here, first considering the variable SP and running regression on its standardised residue as stated above: |uSP| = f(SP) the t-value of coefficient of SP is 0.062, which is insignificant. Thus there is no heteroscedasticity. Now taking HP and checking it for heteroscedasticity using model: |uHP| = f(HP) In this case obtained t-value is 0.811, which is insignificant. Thus there is no heteroscedasticity in this case as well. Now checking for the remaining

independent variable that is WT: |uWT| = f(WT) The obtained value of t-statistic is 3.224, which is significant. Thus there is existence of heteroscedasticity in case of vehicle weight. Hence it is not evenly distributed.