Econometric Theory and Methods

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Solution to Exercise 7.13

7.13 Consider testing for rst-order serial correlation of the error terms in the regression model y = y1 + u, | | < 1, (7.97) where y1 is the vector with typical element yt1 , by use of the statistics tGNR and tSR dened in (7.51) and (7.52), respectively. Show rst that MX y2 , 1 in (7.51) and (7.52) is equal to the vector denoted as MX u where y2 is the vector with typical element yt2 , and is the OLS estimate of from (7.97). Then show that, as n , tGNR tends to the random 2 variable u plim n1/2 ( y1 y2 ) u, whereas tSR tends to the same random variable times . Show nally that tGNR , but not tSR , provides an asymptotically correct test, by showing that the random variable is asymptotically distributed as N(0, 1).

y2 . Since the projection matrix MX is 1 = y1 For the model (7.97), u equal to I y1 (y1 y1 )1 y1 in this case, it annihilates y1 . Therefore, y2 = MX y2 , 1 = MX y1 MX MX u which is the rst result that was to be proved. The numerator of both statistics is u MX y2 , MX u 1 = n1/2 n1/2 u (S7.17) (S7.16)

= MX u. If we where we have used (S7.16) and the standard result that u substitute I y1 (y1 y1 )1 y1 for MX in (S7.17), the right-hand side becomes u y2 u y1 (y1 y1 )1 y1 y2 . n 1 /2 and (y1 y1 )1 y1 y2 both tend to as n , the probability limit Because of this expression is the random variable
n

plim n1/2 u ( y1 y2 ).

(S7.18)

The denominator of tGNR is 1 MX u 1 )1/2. s(n1 u 1 has The rst factor evidently tends to u under the null hypothesis, since u , asymptotically. The second factor is the square no explanatory power for u root of 2 y2 MX y2 , 1 MX u 1 = n1 n1 u Copyright c 2003, Russell Davidson and James G. MacKinnon

Econometric Theory and Methods

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where the equality follows from (S7.16). By essentially the same argument as the one that led to (S7.18), this is asymptotically equal to n1 2 y2 y2 n1 4 y1 y1 . (S7.19)

2 Using the fact that yt has variance u /(1 2 ), it is easy to see that the 2 limit in probability of both n1 y1 y1 and n1 y2 y2 is u /(1 2 ). Therefore, expression (S7.19) is asymptotically equal to 2 2 2 u u (1 2 ) 2 4 2 ( ) = = 2 u . 1 2 1 2

(S7.20)

Thus the denominator of tGNR is asymptotically equal to u times the square 2 root of (S7.20), or u . Transposing (S7.18), which is of course a scalar, and dividing it by this denominator yields the desired result that
n 2 plim tGNR = u plim n1/2 ( y1 y2 ) u.

(S7.21)

The analysis for tSR is similar to, but simpler than, the one for tGNR . Both statistics have the same numerator, which is asymptotically equal to (S7.18). The rst factor in the denominator of tSR is s , which evidently tends to u 1 u 1 )1/2. Since n1 under the null hypothesis, and the second factor is (n1 u times the sum of squares of the residuals lagged once must be asymptotically the same as n1 times the sum of squared residuals, this second factor clearly has a probability limit of
n

plim (n1 u MX u)1/2 = u

under the null hypothesis. Therefore, the denominator of tSR is asymptotically equal to 1/ times the denominator of tGNR , and we nd that
n 2 plim tSR = u plim n1/2 ( y1 y2 ) u,

which was the result to be proved. In order to show that tGNR is asymptotically distributed as N(0, 1) under the null hypothesis, we must show that has mean 0 and variance 1 and that it is asymptotically normally distributed. That it has mean 0 follows immediately from the fact that, under the null hypothesis, ut is uncorrelated with yt1 and yt2 . That it is asymptotically normally distributed follows from the fact that we can apply a central limit theorem to both of the quantities
n n

n1/2
t=2

ut yt1

and

n1/2
t=3

ut yt2 ,

(S7.22)

Copyright c 2003, Russell Davidson and James G. MacKinnon

Econometric Theory and Methods

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2 since the dierence between these quantities, when divided by u , is asymptotically equal to .

It remains to show that the variance of is 1. Since the factors of n1/2 oset the fact that both terms in (S7.22) are summations, it is clear that the 4 variance of is 1/u times
2 2 2 2 Var( ut yt1 ut yt2 ) = E( 2 u2 t yt1 2 ut yt1 yt2 + ut yt2 ).

(S7.23)

Because ut is independent of yt1 ,

2 2 2 2 E(u2 t yt1 ) = u E(yt1 ) = u 2 4 2 Similarly, E(u2 t yt2 ) = u /(1 ), and 2 2 E(u2 t yt1 yt2 ) = u E(yt1 yt2 ) = u 4 2 u u = . 1 2 1 2 4 2 u u = . 1 2 1 2

Thus we nd that (S7.23) equals

4 4 4 4 4 2 u 2 u u u 2 u 2 + = 1 2 1 2 1 2 1 2 1 2 4 (1 2 )u 4 = = u . 1 2

Therefore, the variance of itself is just 1, and we conclude that N(0, 1). Because tSR is asymptotically equal to times tGNR , it must be asymptotically distributed as N(0, 2 ). Since | | < 1, the asymptotic variance of tSR is always less than that of tGNR .

Copyright c 2003, Russell Davidson and James G. MacKinnon