TUTORIAL AE 18.10: Serial Correlation and Heteroskedasticity | N. A.

S: HE22

1) MODEL MISSEPECIFICATION: RAMSEY RESET TEST

Estimate Least Square: Dependent Variable: DGOLD

Go to EViews: generate Method: Least Squares
Date: 10/18/18 Time: 10:18
original equation: Sample (adjusted): 1979M01 2018M06
Included observations: 474 after adjustments
dgold c dcpi dipi
Variable Coefficient Std. Error t-Statistic Prob.

C -0.150238 0.266557 -0.563626 0.5733

DCPI 1.940438 0.572333 3.390398 0.0008
DIPI -0.026776 0.314148 -0.085234 0.9321

R-squared 0.023839 Mean dependent var 0.383816

Adjusted R-squared 0.019694 S.D. dependent var 4.598183
S.E. of regression 4.552680 Akaike info criterion 5.875618
Sum squared resid 9762.369 Schwarz criterion 5.901955
Log likelihood -1389.522 Hannan-Quinn criter. 5.885976
F-statistic 5.751129 Durbin-Watson stat 1.590307
Prob(F-statistic) 0.003407

*if dgold data not exist,

then generate as:
dgold=100*dlog (gold),

Same for dcpi and dipi:

dcpi=100*dlog(cpi)
dipi=100*dlog(ipi)

Back to the original

equation (dgold c dcpi
dipi),

Then go to view,

click Actual, Fitted,

Residual,

choose Actual, Fitted,

Residual Table.
 TUTORIAL AE 18.10: Serial Correlation and Heteroskedasticity | N. A. S: HE22

Then copy the fitted

data to excel

and copy it back to

EViews by click on
object,
select new object.

At the type of object:

series and the name for
object: dgold_fitted,
then paste the data you
copy from excel
 TUTORIAL AE 18.10: Serial Correlation and Heteroskedasticity | N. A. S: HE22

Generate equation:
dgold c dcpi dipi
dgold_fitted

Dependent Variable: DGOLD

Method: Least Squares
Date: 11/13/18 Time: 02:00
Sample (adjusted): 1979M01 2018M05
Included observations: 473 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C -0.155651 0.268059 -0.580658 0.5617

DCPI 1.738992 0.720532 2.413485 0.0162
DIPI -0.022069 0.314869 -0.070089 0.9442
DGOLD_FITTED 0.168908 0.372216 0.453790 0.6502

R-squared 0.024182 Mean dependent var 0.388129

Adjusted R-squared 0.017940 S.D. dependent var 4.602092
S.E. of regression 4.560623 Akaike info criterion 5.881216
Sum squared resid 9754.865 Schwarz criterion 5.916388
Log likelihood -1386.908 Hannan-Quinn criter. 5.895050
F-statistic 3.874177 Durbin-Watson stat 1.593986
Prob(F-statistic) 0.009338

Generate equation:
dgold c dcpi dipi
dgold_fitted^2
dgold_fitted^3
 TUTORIAL AE 18.10: Serial Correlation and Heteroskedasticity | N. A. S: HE22

Dependent Variable: DGOLD

Method: Least Squares
Date: 10/18/18 Time: 10:41
Sample (adjusted): 1979M01 2018M05
Included observations: 473 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C -0.155810 0.279262 -0.557936 0.5772

DCPI 1.090836 0.677725 1.609556 0.1082
DIPI 0.053124 0.315645 0.168304 0.8664
DGOLD_FITTED^2 0.245089 0.173842 1.409840 0.1593
DGOLD_FITTED^3 0.132000 0.066795 1.976193 0.0487

R-squared 0.034994 Mean dependent var 0.388129

Adjusted R-squared 0.026746 S.D. dependent var 4.602092
S.E. of regression 4.540130 Akaike info criterion 5.874303
Sum squared resid 9646.783 Schwarz criterion 5.918268
Log likelihood -1384.273 Hannan-Quinn criter. 5.891596
F-statistic 4.242782 Durbin-Watson stat 1.631854
Prob(F-statistic) 0.002204

WALD TEST is
insignificant

Go to ‘Original
equation’ (dgold c dcpi
dipi)

Then go to View, click

on Coefficient
Diagnostics, click Wald
Test: Coefficient
restrictions
Wald Test:
Equation: ORI_MODEL
Enter: c(2)=0, c(3)=0
Test Statistic Value df Probability
Click OK
F-statistic 5.751129 (2, 471) 0.0034
Chi-square 11.50226 2 0.0032

Null Hypothesis: C(2)=0, C(3)=0

Null Hypothesis Summary:

Normalized Restriction (= 0) Value Std. Err.

C(2) 1.940438 0.572333

C(3) -0.026776 0.314148

Restrictions are linear in coefficients.

 TUTORIAL AE 18.10: Serial Correlation and Heteroskedasticity | N. A. S: HE22

For RAMSEY RESET

TEST

Still use the original

equation (dgold c dcpi
dipi)
Ramsey RESET Test
Equation: ORI_MODEL
Go to View, Specification: DGOLD C DCPI DIPI
then click on Stability Omitted Variables: Powers of fitted values from 2 to 3
Diagnostics and click
Ramsey RESET Test Value df Probability
F-statistic 0.594537 (2, 469) 0.5522
Number of fitted terms: Likelihood ratio 1.200230 2 0.5487
2
F-test summary:
Sum of Sq. df Mean Squares
Click OK Test SSR 24.68832 2 12.34416
Restricted SSR 9762.369 471 20.72690
Unrestricted SSR 9737.681 469 20.76265

LR test summary:
Value
Restricted LogL -1389.522
Unrestricted LogL -1388.921

Unrestricted Test Equation:

Dependent Variable: DGOLD
Method: Least Squares
Date: 11/13/18 Time: 01:42
Sample: 1979M01 2018M06
Included observations: 474

Variable Coefficient Std. Error t-Statistic Prob.

C -0.110949 0.290473 -0.381960 0.7027

DCPI 1.219367 0.899374 1.355795 0.1758
DIPI 0.032181 0.322166 0.099888 0.9205
FITTED^2 0.167628 0.191133 0.877022 0.3809
FITTED^3 0.074750 0.085313 0.876191 0.3814

R-squared 0.026307 Mean dependent var 0.383816

Adjusted R-squared 0.018003 S.D. dependent var 4.598183
S.E. of regression 4.556605 Akaike info criterion 5.881525
Sum squared resid 9737.681 Schwarz criterion 5.925420
Log likelihood -1388.921 Hannan-Quinn criter. 5.898788
F-statistic 3.167882 Durbin-Watson stat 1.602069
Prob(F-statistic) 0.013816
 TUTORIAL AE 18.10: Serial Correlation and Heteroskedasticity | N. A. S: HE22

2) COCHRANE ORCUTT
1. Estimate Least Square:
generate original equation: Dependent Variable: DGOLD
Method: Least Squares
Date: 10/18/18 Time: 10:18
Sample (adjusted): 1979M01 2018M06
dgold c dcpi dipi Included observations: 474 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C -0.150238 0.266557 -0.563626 0.5733

DCPI 1.940438 0.572333 3.390398 0.0008
DIPI -0.026776 0.314148 -0.085234 0.9321

R-squared 0.023839 Mean dependent var 0.383816

Adjusted R-squared 0.019694 S.D. dependent var 4.598183
S.E. of regression 4.552680 Akaike info criterion 5.875618
Sum squared resid 9762.369 Schwarz criterion 5.901955
Log likelihood -1389.522 Hannan-Quinn criter. 5.885976
F-statistic 5.751129 Durbin-Watson stat 1.590307
Prob(F-statistic) 0.003407

2. Then, get the error term, e: Residual

Copy the Residual data to excel

Then go to EViews,

Click on Object – New object –

for the Type of object: Series, and Name
of object: e_co – OK

Click on e_co series and paste the

Residual data from the excel
 TUTORIAL AE 18.10: Serial Correlation and Heteroskedasticity | N. A. S: HE22

3. After that, estimate equation: e_co

e_co(-1)

Serial Correlation of AR(1) model

Dependent Variable: E_CO

Method: Least Squares
Date: 10/18/18 Time: 11:24
Sample (adjusted): 1979M01 2018M05
Included observations: 473 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

E_CO(-1) 0.201924 0.044955 4.491662 0.0000

R-squared 0.040980 Mean dependent var -0.015700

Adjusted R-squared 0.040980 S.D. dependent var 4.534965
S.E. of regression 4.441071 Akaike info criterion 5.821780
Sum squared resid 9309.309 Schwarz criterion 5.830573
Log likelihood -1375.851 Hannan-Quinn criter. 5.825239
Durbin-Watson stat 1.943961

4. Estimate e e(t-1);
Estimate first order Serial Correlation
coefficient to it lagged term
e.g: dgold-( coeff)*dgold(-1)
 TUTORIAL AE 18.10: Serial Correlation and Heteroskedasticity | N. A. S: HE22

Estimate first order Serial Correlation

coefficient to it lagged term

▪ dgold_fgls =dgold-0.201924*dgold(-1),
▪ dcpi_fgls =dcpi-0.201924*dcpi(-1),
▪ dipi_fgls =dipi-0.201924*dipi(-1)

Dependent Variable: DGOLD-0.201924*DGOLD(-1)

Method: Least Squares
Date: 10/18/18 Time: 11:36
Sample (adjusted): 1979M02 2018M06
Included observations: 473 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

C -0.181199 0.250066 -0.724602 0.4691

DCPI-0.201924*DCPI(-1) 2.083468 0.629026 3.312214 0.0010
DIPI-0.201924*DIPI(-1) 0.085469 0.318401 0.268431 0.7885

R-squared 0.022927 Mean dependent var 0.287292

Adjusted R-squared 0.018769 S.D. dependent var 4.492008
S.E. of regression 4.449653 Akaike info criterion 5.829852
Sum squared resid 9305.723 Schwarz criterion 5.856231
Log likelihood -1375.760 Hannan-Quinn criter. 5.840227
F-statistic 5.514238 Durbin-Watson stat 1.940279
Prob(F-statistic) 0.004294
 TUTORIAL AE 18.10: Serial Correlation and Heteroskedasticity | N. A. S: HE22

Feasible Generalized Least Square, FGLS

estimators:
▪ weight for heteroscedasticity and
serial correlation

*compare with the original model LS

and Serial Correlation model

Dependent Variable: DGOLD_FGLS

Method: Least Squares
Date: 10/18/18 Time: 09:54
Sample (adjusted): 1979M02 2018M06
Included observations: 473 after adjustments

Variable Coefficient Std. Error t-Statistic Prob.

DCPI_FGLS 2.083468 0.629026 3.312214 0.0010

DIPI_FGLS 0.085469 0.318401 0.268431 0.7885
C -0.181199 0.250066 -0.724602 0.4691

R-squared 0.022927 Mean dependent var 0.287292

Adjusted R-squared 0.018769 S.D. dependent var 4.492008
S.E. of regression 4.449653 Akaike info criterion 5.829852
Sum squared resid 9305.723 Schwarz criterion 5.856231
Log likelihood -1375.760 Hannan-Quinn criter. 5.840227
F-statistic 5.514238 Durbin-Watson stat 1.940279
Prob(F-statistic) 0.004294

Breusch-Godfrey Test: to test Serial

Correlation of AR(1) model [e_c0(1)]

Go to View,

Click on Residual Diagnostics – Serial

Correlation LM Test –

For the Lag Specification,

Lags to include: 2 (can put any value you
like) – OK

Prob. Chi-Square (2) = 0, no

autocorrelation
TUTORIAL AE 18.10: Serial Correlation and Heteroskedasticity | N. A. S: HE22

Breusch-Godfrey Serial Correlation LM Test:

Null hypothesis: No serial correlation at up to 2 lags

F-statistic 5.789660 Prob. F(2,468) 0.0033

Obs*R-squared 11.42046 Prob. Chi-Square(2) 0.0033

Test Equation:
Dependent Variable: RESID
Method: Least Squares
Date: 10/18/18 Time: 10:02
Sample: 1979M02 2018M06
Included observations: 473
Presample missing value lagged residuals set to zero.

Variable Coefficient Std. Error t-Statistic Prob.

DCPI_FGLS 0.009028 0.622721 0.014498 0.9884

DIPI_FGLS 0.035001 0.315673 0.110876 0.9118
C -0.004871 0.247568 -0.019677 0.9843
RESID(-1) 0.033096 0.045715 0.723967 0.4694
RESID(-2) -0.152942 0.045746 -3.343307 0.0009

R-squared 0.024145 Mean dependent var -9.15E-17

Adjusted R-squared 0.015804 S.D. dependent var 4.440216
S.E. of regression 4.404989 Akaike info criterion 5.813867
Sum squared resid 9081.039 Schwarz criterion 5.857832
Log likelihood -1369.980 Hannan-Quinn criter. 5.831160
F-statistic 2.894830 Durbin-Watson stat 1.989494
Prob(F-statistic) 0.021827