TestsforSerialCorrelation - EC220 Tests for Autocorrelation...

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20.02.10 EC220 Tests for Autocorrelation 2009/2010 This note extends the discussion of tests for autocorrelation in the text. The material becomes part of the EC220 syllabus. However, it will not be covered in the 2010 examination. Durbin’s ‘alternative’ test for autoregressive autocorrelation The Durbin–Watson test is appropriate only when both parts of Assumption C.7 are satisfied. When the lagged dependent is used as one of the regressors, the second part of Assumption C.7 is automatically violated. Durbin proposed two tests for application in this case. One is the Durbin h test described in the text. This test has two limitations. One is that the h statistic cannot be computed if the denominator under the square root is negative. The other is that it cannot be generalized to test for higher-order autocorrelation. It is strictly an AR(1) test. The other test, which will be described here as Durbin’s alternative test, since it does not seem to have a name, proceeds as follows. Suppose that the regression model is t s t s t r r t u Y Y X X Y 1 1 2 2 1 ... (1) and it is hypothesized that the disturbance term may be determined by the AR( p ) process t p t p t t u u u ... 1
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TestsforSerialCorrelation - EC220 Tests for Autocorrelation...

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