EIA2014 ECONOMETRIC II / EIE3003 ECONOMETRIC ANALYSIS

Exercise 6 answers

1. Heteroskedasticity 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 heteroskedasticity.

1
c) (i) Breusch-Pagan-Godfrey test:

Dependent Variable: U^2

Method: Least Squares
Sample: 1 18
Included observations: 18

Variable Coefficient Std. Error t-Statistic Prob.  

C -4420124. 3172669. -1.393188 0.1826

PROFITS 1326.739 292.8470 4.530486 0.0003

R-squared 0.561948    Mean dependent var 6517071.

Adjusted R-squared 0.534569    S.D. dependent var 12802017
S.E. of regression 8733855.    Akaike info criterion 34.90775
Sum squared resid 1.22E+15    Schwarz criterion 35.00668
Log likelihood -312.1698    Hannan-Quinn criter. 34.92139
F-statistic 20.52530    Durbin-Watson stat 1.858529
Prob(F-statistic) 0.000341

n R2=18 ( 0.561948 ) =10.1151

2
At α =0.05 , χ 1=3.841 .
Decision: reject H 0. There is heteroskedasticity.

Heteroskedasticity Test: Breusch-Pagan-Godfrey

F-statistic 20.52530    Prob. F(1,16) 0.0003

Obs*R-squared 10.11506    Prob. Chi-Square(1) 0.0015
Scaled explained SS 14.56336    Prob. Chi-Square(1) 0.0001

Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Sample: 1 18
Included observations: 18

Variable Coefficient Std. Error t-Statistic Prob.  

C -4420124. 3172669. -1.393188 0.1826

PROFITS 1326.739 292.8470 4.530486 0.0003

R-squared 0.561948    Mean dependent var 6517071.

Adjusted R-squared 0.534569    S.D. dependent var 12802017
S.E. of regression 8733855.    Akaike info criterion 34.90775
Sum squared resid 1.22E+15    Schwarz criterion 35.00668
Log likelihood -312.1698    Hannan-Quinn criter. 34.92139
F-statistic 20.52530    Durbin-Watson stat 1.858529
Prob(F-statistic) 0.000341

LM =10.11506 , p−value=0.0015<0.05.
Decision: reject H 0 . There is heteroskedasticity.

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(ii) Glejser test:

Dependent Variable: ABS(U)

Method: Least Squares
Sample: 1 18
Included observations: 18

Variable Coefficient Std. Error t-Statistic Prob.  

C -25.40437 398.5524 -0.063742 0.9500

PROFITS 0.217205 0.036788 5.904293 0.0000

R-squared 0.685415    Mean dependent var 1765.159

Adjusted R-squared 0.665754    S.D. dependent var 1897.725
S.E. of regression 1097.152    Akaike info criterion 16.94326
Sum squared resid 19259864    Schwarz criterion 17.04219
Log likelihood -150.4894    Hannan-Quinn criter. 16.95690
F-statistic 34.86068    Durbin-Watson stat 2.213889
Prob(F-statistic) 0.000022

2
n R =18 ( 0.685415 ) =12.3375
2
At α =0.05 , χ 1=3.841 .
Decision: reject H 0 . There is heteroskedasticity.
Heteroskedasticity Test: Glejser

F-statistic 34.86068    Prob. F(1,16) 0.0000

Obs*R-squared 12.33747    Prob. Chi-Square(1) 0.0004
Scaled explained SS 15.75081    Prob. Chi-Square(1) 0.0001

Test Equation:
Dependent Variable: ARESID
Method: Least Squares
Sample: 1 18
Included observations: 18

Variable Coefficient Std. Error t-Statistic Prob.  

C -25.40437 398.5524 -0.063742 0.9500

PROFITS 0.217205 0.036788 5.904293 0.0000

R-squared 0.685415    Mean dependent var 1765.159

Adjusted R-squared 0.665754    S.D. dependent var 1897.725
S.E. of regression 1097.152    Akaike info criterion 16.94326
Sum squared resid 19259864    Schwarz criterion 17.04219
Log likelihood -150.4894    Hannan-Quinn criter. 16.95690
F-statistic 34.86068    Durbin-Watson stat 2.213889
Prob(F-statistic) 0.000022

LM =12.33747 , p−value=0.0004<0.05 .
Decision: reject H 0 . There is heteroskedasticity.

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(iii) Harvey test:

Dependent Variable: LOG(U^2)

Method: Least Squares
Sample: 1 18
Included observations: 18

Variable Coefficient Std. Error t-Statistic Prob.  

C 10.29512 1.202608 8.560666 0.0000

PROFITS 0.000357 0.000111 3.214645 0.0054

R-squared 0.392419    Mean dependent var 13.23679

Adjusted R-squared 0.354445    S.D. dependent var 4.120394
S.E. of regression 3.310589    Akaike info criterion 5.336568
Sum squared resid 175.3600    Schwarz criterion 5.435499
Log likelihood -46.02912    Hannan-Quinn criter. 5.350210
F-statistic 10.33394    Durbin-Watson stat 2.339643
Prob(F-statistic) 0.005409

n R2=18 ( 0.392419 ) =7.0635

2
At α =0.05 , χ 1=3.841 .
Decision: reject H 0 . There is heteroskedasticity.

Heteroskedasticity Test: Harvey

F-statistic 10.33394    Prob. F(1,16) 0.0054

Obs*R-squared 7.063544    Prob. Chi-Square(1) 0.0079
Scaled explained SS 22.95127    Prob. Chi-Square(1) 0.0000

Test Equation:
Dependent Variable: LRESID2
Method: Least Squares
Sample: 1 18
Included observations: 18

Variable Coefficient Std. Error t-Statistic Prob.  

C 10.29512 1.202608 8.560666 0.0000

PROFITS 0.000357 0.000111 3.214645 0.0054

R-squared 0.392419    Mean dependent var 13.23679

Adjusted R-squared 0.354445    S.D. dependent var 4.120394
S.E. of regression 3.310589    Akaike info criterion 5.336568
Sum squared resid 175.3600    Schwarz criterion 5.435499
Log likelihood -46.02912    Hannan-Quinn criter. 5.350210
F-statistic 10.33394    Durbin-Watson stat 2.339643
Prob(F-statistic) 0.005409

LM =7.063544 , p−value=0.0079<0.05.
Decision: reject H 0. There is heteroskedasticity.

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(iv) ARCH test:

Dependent Variable: U2
Method: Least Squares
Sample (adjusted): 2 18
Included observations: 17 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.  

C 3795320. 3208290. 1.182973 0.2552

U2(-1) 0.482037 0.223929 2.152638 0.0480

R-squared 0.236013    Mean dependent var 6900033.

Adjusted R-squared 0.185081    S.D. dependent var 13089309
S.E. of regression 11816095    Akaike info criterion 35.51795
Sum squared resid 2.09E+15    Schwarz criterion 35.61598
Log likelihood -299.9026    Hannan-Quinn criter. 35.52770
F-statistic 4.633850    Durbin-Watson stat 1.565065
Prob(F-statistic) 0.048034

2
nR =17 ( 0.236013 )=4.0122
2
At α =0.05 , χ 1=3.841 .
Decision: reject H 0. There is heteroskedasticity.

Heteroskedasticity Test: ARCH

F-statistic 4.633850    Prob. F(1,15) 0.0480

Obs*R-squared 4.012226    Prob. Chi-Square(1) 0.0452

Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Sample (adjusted): 2 18
Included observations: 17 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.  

C 3795320. 3208290. 1.182973 0.2552

RESID^2(-1) 0.482037 0.223929 2.152638 0.0480

R-squared 0.236013    Mean dependent var 6900033.

Adjusted R-squared 0.185081    S.D. dependent var 13089309
S.E. of regression 11816095    Akaike info criterion 35.51795
Sum squared resid 2.09E+15    Schwarz criterion 35.61598
Log likelihood -299.9026    Hannan-Quinn criter. 35.52770
F-statistic 4.633850    Durbin-Watson stat 1.565065
Prob(F-statistic) 0.048034

LM =4.012226, p−value=0.0452< 0.05.

Decision: reject H 0 . There is heteroskedasticity.

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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:

Dependent Variable: RDEXP/SQR(PROFITS)

Method: Least Squares
Sample: 1 18
Included observations: 18

Variable Coefficient Std. Error t-Statistic Prob.  

1/SQR(PROFITS) -22.02421 227.3591 -0.096870 0.9240

SQR(PROFITS) 0.373484 0.065458 5.705729 0.0000

R-squared 0.359150    Mean dependent var 29.55156

Adjusted R-squared 0.319097    S.D. dependent var 27.71253
S.E. of regression 22.86750    Akaike info criterion 9.201750
Sum squared resid 8366.764    Schwarz criterion 9.300680
Log likelihood -80.81575    Hannan-Quinn criter. 9.215391
Durbin-Watson stat 3.021320

Or consider that the error term proportional to profits. Thus, regress

(R&D/Profits) on (1/Profits) and a constant. The results of this regression are:

Dependent Variable: RDEXP/PROFITS

Method: Least Squares
Sample: 1 18
Included observations: 18

Variable Coefficient Std. Error t-Statistic Prob.  

1/PROFITS 18.94114 43.90874 0.431375 0.6720

C 0.345492 0.068139 5.070408 0.0001

R-squared 0.011497    Mean dependent var 0.358435

Adjusted R-squared -0.050285    S.D. dependent var 0.253266
S.E. of regression 0.259555    Akaike info criterion 0.244745
Sum squared resid 1.077903    Schwarz criterion 0.343675
Log likelihood -0.202701    Hannan-Quinn criter. 0.258386
F-statistic 0.186084    Durbin-Watson stat 2.618858
Prob(F-statistic) 0.671952

Alternatively, try to use log transformed variables (refer question 3).

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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:

Dependent Variable: LOG(RDEXP)

Method: Least Squares
Sample: 1 6
Included observations: 6

Variable Coefficient Std. Error t-Statistic Prob.  

C 0.961084 2.505328 0.383616 0.7208

LOG(PROFITS) 0.651111 0.354856 1.834858 0.1404

R-squared 0.457016    Mean dependent var 5.499862

Adjusted R-squared 0.321270    S.D. dependent var 1.180984
S.E. of regression 0.972954    Akaike info criterion 3.044242
Sum squared resid 3.786559    Schwarz criterion 2.974828
Log likelihood -7.132726    Hannan-Quinn criter. 2.766374
F-statistic 3.366704    Durbin-Watson stat 2.602276
Prob(F-statistic) 0.140434

Dependent Variable: LOG(RDEXP)

Method: Least Squares
Sample: 13 18
Included observations: 6

Variable Coefficient Std. Error t-Statistic Prob.  

C -0.279271 14.21583 -0.019645 0.9853

LOG(PROFITS) 0.898619 1.463847 0.613875 0.5725

R-squared 0.086099    Mean dependent var 8.444279

Adjusted R-squared -0.142376    S.D. dependent var 0.881370
S.E. of regression 0.942025    Akaike info criterion 2.979632
Sum squared resid 3.549647    Schwarz criterion 2.910219
Log likelihood -6.938897    Hannan-Quinn criter. 2.701764
F-statistic 0.376842    Durbin-Watson stat 1.953293
Prob(F-statistic) 0.572492

SSE1 3.786559/4
F= = =1.0667
SSE2 3.549647/4
At α =0.05 , F 0.05,4,4=6.39.
F=1.0667< F 0.05,4,4 =6.39.

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 Decision: do not reject H 0 . There is no heteroskedasticity.
4. –

a) Estimation results:

Dependent Variable: LE
Method: Least Squares
Sample: 1 85
Included observations: 85

Variable Coefficient Std. Error t-Statistic Prob.  

C 39.43802 1.948595 20.23921 0.0000

INCOME 0.000542 0.000122 4.441731 0.0000
ACCESS 0.283303 0.028444 9.959961 0.0000

R-squared 0.774146    Mean dependent var 63.13412

Adjusted R-squared 0.768637    S.D. dependent var 10.54996
S.E. of regression 5.074547    Akaike info criterion 6.121008
Sum squared resid 2111.584    Schwarz criterion 6.207219
Log likelihood -257.1428    Hannan-Quinn criter. 6.155684
F-statistic 140.5332    Durbin-Watson stat 1.983983
Prob(F-statistic) 0.000000

b) White test

Dependent Variable: U^2

Method: Least Squares
Sample: 1 85
Included observations: 85

Variable Coefficient Std. Error t-Statistic Prob.  

C -35.58042 31.98196 -1.112515 0.2693

INCOME 0.040737 0.017997 2.263509 0.0263
INCOME^2 -1.94E-07 2.09E-07 -0.929072 0.3557
ACCESS 2.029915 1.156166 1.755730 0.0830
ACCESS^2 -0.015739 0.009705 -1.621812 0.1088
INCOME*ACCESS -0.000385 0.000177 -2.172736 0.0328

R-squared 0.187034    Mean dependent var 24.84216

Adjusted R-squared 0.135580    S.D. dependent var 39.27785
S.E. of regression 36.51825    Akaike info criterion 10.10147
Sum squared resid 105353.0    Schwarz criterion 10.27390
Log likelihood -423.3127    Hannan-Quinn criter. 10.17083
F-statistic 3.635008    Durbin-Watson stat 2.008763
Prob(F-statistic) 0.005189

2
n R =85 ( 0.187034 )=15.8979
2
At α =0.05 , χ 5=11.070.
Decision: reject H 0. There is heteroskedasticity.

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 Heteroskedasticity Test: White

F-statistic 3.635008    Prob. F(5,79) 0.0052

Obs*R-squared 15.89789    Prob. Chi-Square(5) 0.0071
Scaled explained SS 18.27580    Prob. Chi-Square(5) 0.0026

Test Equation:
Dependent Variable: RESID^2
Method: Least Squares
Sample: 1 85
Included observations: 85

Variable Coefficient Std. Error t-Statistic Prob.  

C -35.58042 31.98196 -1.112515 0.2693

INCOME^2 -1.94E-07 2.09E-07 -0.929072 0.3557
INCOME*ACCESS -0.000385 0.000177 -2.172736 0.0328
INCOME 0.040737 0.017997 2.263509 0.0263
ACCESS^2 -0.015739 0.009705 -1.621812 0.1088
ACCESS 2.029915 1.156166 1.755730 0.0830

R-squared 0.187034    Mean dependent var 24.84216

Adjusted R-squared 0.135580    S.D. dependent var 39.27785
S.E. of regression 36.51825    Akaike info criterion 10.10147
Sum squared resid 105353.0    Schwarz criterion 10.27390
Log likelihood -423.3127    Hannan-Quinn criter. 10.17083
F-statistic 3.635008    Durbin-Watson stat 2.008763
Prob(F-statistic) 0.005189

n R2=15.89789 , p−value=0.0071< 0.05.

Decision: reject H 0. There is heteroscedasticity.

c) One can use a variety of transformations to resolve it. You are urged to plot
the squared residuals of the model on each of the explanatory variables to
see which variable might be used to transform the data to eliminate
heteroskedasticity.