HW11_sol

HW11_sol - ECON 414 SOLUTION TO HOMEWORK 11 Spring 2010...

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ECON 414 SOLUTION TO HOMEWORK 11 Spring 2010 12.5 (i) There is substantial serial correlation in the errors of the equation, and the OLS standard errors almost certainly underestimate the true standard deviation in ˆ EZ β . This makes the usual confidence interval for EZ and t statistics invalid. (ii) We can use the method in Section 12.5 to obtain an approximately valid standard error. [See equation (12.43).] While we might use g = 2 in equation (12.42), with monthly data we might want to try a somewhat longer lag, maybe even up to g = 12. C12.1 Regressing ˆ t u on 1 ˆ t u - , using the 69 available observations, gives ˆ ρ .292 and se( ˆ ) .118. The t statistic is about 2.47, and so there is significant evidence of positive AR(1) serial correlation in the errors (even though the variables have been differenced). This means we should view the standard errors reported in equation (11.27) with some suspicion. C12.9 (i) Here are the OLS regression results: · log( ) avgprc = - .073 - .0040 t - .0101 mon - .0088 tues + .0376 wed + .0906 thurs (.115) (.0014) (.1294) (.1273) (.1257) (.1257) n = 97, R 2 = .086 The test for joint significance of the day-of-the-week dummies is
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HW11_sol - ECON 414 SOLUTION TO HOMEWORK 11 Spring 2010...

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