(a)State in algebraic notation and explain the assumption about the classical linear regression models disturbances that are referred to by the term ‘homoscedasticity’.
(b)What would the consequence be for a regression model if theerrors were not homoscedastic?
(c) How might you proceed if you found that (b) were actually the case?
(d) What do you understand by the term ‘autocorrelation’?
(e) An econometrician suspects that the residuals of her model mightbe autocorrelated. Explain the steps involved in testing this theoryusing the Durbin–Watson (DW) test.
(f) The econometrician follows your guidancein part (b) andcalculates a value for the Durbin–Watson statistic of 0.95. The regression has 60 quarterly observations and three explanatory variables (plus a constant term). Perform the test. What is your conclusion?
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