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    The document summarizes several statistical tests used to detect issues in regression analysis: 1) Breusch-Godfrey test detects autocorrelation in the residuals by regressing the residuals on lagged values and tests if the lagged values are jointly significant. 2) Jarque-Bera test checks if the residuals are normally distributed by testing if their skewness and kurtosis equal values under normality. 3) ARCH test checks for heteroscedasticity where current volatility depends on past shocks by regressing squared residuals on lagged squared residuals. 4) White test checks for constant error variance or homoscedasticity by adding squared terms and cross products of regress

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    The document summarizes several statistical tests used to detect issues in regression analysis: 1) Breusch-Godfrey test detects autocorrelation in the residuals by regressing the residuals on lagged values and tests if the lagged values are jointly significant. 2) Jarque-Bera test checks if the residuals are normally distributed by testing if their skewness and kurtosis equal values under normality. 3) ARCH test checks for heteroscedasticity where current volatility depends on past shocks by regressing squared residuals on lagged squared residuals. 4) White test checks for constant error variance or homoscedasticity by adding squared terms and cross products of regress

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    15 views5 pages

    Section C, Question 5

    Uploaded by

    Divyen Patel
    The document summarizes several statistical tests used to detect issues in regression analysis: 1) Breusch-Godfrey test detects autocorrelation in the residuals by regressing the residuals on lagged values and tests if the lagged values are jointly significant. 2) Jarque-Bera test checks if the residuals are normally distributed by testing if their skewness and kurtosis equal values under normality. 3) ARCH test checks for heteroscedasticity where current volatility depends on past shocks by regressing squared residuals on lagged squared residuals. 4) White test checks for constant error variance or homoscedasticity by adding squared terms and cross products of regress

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    of 5

    Breusch-Godfrey:

    What does it do? It is used to detect autocorrelation. I.E whether there is any relationship between the error terms. It tests for the rth order of autocorrelation.

    How is it carried out? (Slide 130) Null H0: = p1 0 and pr = 0 Alt. H1: p1 0 andpr 0 a) Estimate the linear regression using OLS methodology, obtain residuals b) Regress ut on all regressors from step a. Obtain r^2 c) (T-r) R^2 ~ X^2 (r) [~ means this is this, and that is that] d) If (T-r) R^2 > critical value, no autocorrelation probably > 0.05 accept null.

    What do the values suggest? Reject the null because the value is lower than 0.05, therefore it is not significant which means we do have autocorrelation in the residuals. What are the consequences of ignoring autocorrelation if it is present? See slide 131 What are the remedies? See slide 132-134

    Jarque-Bera:
    What does it do? Testing for departures from normality. (Normality is when normal distribution is not skewed and kurtosis is 3 and excess kurtosis is 0.) Jarque-bera formalises this by testing for normality by finding out whether skewness is 0 and kurtosis is 3 and excess is 0. How is it carried out? 1 and 2 can be estimated using the residuals from the OLS regression, Error term. See slide 143 for more detail What does the values suggest? Because the p value is less than the significance we reject the H Null of normality.

    What are the consequences of ignoring this? Any inferences we make through hypothesis testing may be incorrect as it does not follow a normal distribution. What are the remedies? Slide 144

    ARCH Test:
    What does it do? Defined as current volatility or conditional variance depends on the magnitude of past shocks. Todays volatility depends on yesterdays volatility. Essentially for ARCH test, we compute the residuals and run a regression on the residuals of past values. How is it carried out? Estimate yt= 1 + 2xt + t and compute residuals. Estimate (hat on top) = Look at slide 116 for more detail What do the values suggest? We do not reject the null as P value is greater than the significance level, therefore suggesting that there is no heteroscedasticity with past values. What are the remedies? ALL YOU LOT FIGURE THIS OUT AND LET ME KNOW CANT FIND IT!

    White Test:
    What does it do? Related to the second assumption Var (Ut) = 2<. It tests whether the variance of the errors is constant, 2 and if this rings true then it is called homoscedasticity. If the errors do not have a constant variance, we say that they are heteroscedastic. Therefore this test calculates whether the variance of the error terms is constant or not.

    How is it carried out? Carried out by slide 113 -114.

    What does the values suggest? The values suggest that we reject the null hypothesis as the p-value<significance. This suggests that there is heteroscedasticity

    What are the consequences of ignoring this? As the standard errors are incorrect, any inferences made through hypothesis test may be incorrect.

    What are the remedies? Slide 118-119

    RESET Test:
    What does it do? We assume that the appropriate functional form is linear and this may not be the case, therefore the Ramsey RESET Test can formally test whether this is correct or not and is a general test for misspecification of functional form. How is it carried out? Essentially the method works by adding higher order terms of the fitted values into an auxiliary regression Regress u(hat on top)t on powers of the fitted value Obtain R2 from this regression. The test statistic is given by TR2 and is distributed as a (p-1). What do the values suggest? Since the P Value<significance, we do not reject the null hypothesis of correct functional form. What if this is ignored? The functional form is not linear, therefore making our regression no longer BLUE, therefore not the best model it could be if this was corrected. What are the remedies? See Slide 139

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