E adjusted for ination 15 30 e xample 220000 price of

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Unformatted text preview: se in UK (in £) Explanatory variable: GDP (in billions of £) Time span: 1975 Q1 - 2011 Q2 All series are seasonally adjusted and in real prices (i.e. adjusted for inflation) 15 / 30 E XAMPLE 220000 Price of representative house 200000 180000 160000 140000 120000 100000 80000 60000 1975 1980 1985 1990 1995 2000 2005 2010 16 / 30 E XAMPLE 17 / 30 E XAMPLE We test for positive serial correlation: H0 : ρ ≤ 0 (no positive serial correlation) HA : ρ > 0 (positive serial correlation) One-sided DW critical values at 95% confidence for T = 146 and k = 1 are: dL = 1.72 and dU = 1.74 Decision rule: if d < 1.72 if d > 1.74 if 1.72 ≤ d ≤ 1.74 reject H0 do not reject H0 inconclusive Since d = 0.02 < 1.72, we reject the null hypothesis of no positive serial correlation 18 / 30 A LTERNATIVE APPROACH Suppose we suspect the stochastic error term to be AR(p) εt = ρ1 εt−1 + ρ2 εt−2 + . . . + ρp εt−p + ut Since OLS is consistent even under autocorrelation, the residuals are co...
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