Probability

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Agnosticism
Belief
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v·d·e

Probability is a way of expressing knowledge or belief that an event will occur or has occurred.
The concept has an exact mathematical meaning in probability theory, which is used extensively
in such areas of study as mathematics, statistics, finance, gambling, science, artificial
intelligence/machine learning and philosophy to draw conclusions about the likelihood of
potential events and the underlying mechanics of complex systems.

Contents
[hide]

• 1 Interpretations
 • 2 Etymology
• 3 History
• 4 Theory
• 5 Applications
• 6 Mathematical treatment
• 7 Relation to randomness
• 8 See also
• 9 Notes
• 10 References
• 11 Quotations

• 12 External links

[edit] Interpretations
Main article: Probability interpretations

The word probability does not have a consistent direct definition. In fact, there are two broad
categories of probability interpretations, whose adherents possess different (and sometimes
conflicting) views about the fundamental nature of probability:

1. Frequentists talk about probabilities only when dealing with experiments that are random
and well-defined. The probability of a random event denotes the relative frequency of
occurrence of an experiment's outcome, when repeating the experiment. Frequentists
consider probability to be the relative frequency "in the long run" of outcomes.[1]
2. Bayesians, however, assign probabilities to any statement whatsoever, even when no
random process is involved. Probability, for a Bayesian, is a way to represent an
individual's degree of belief in a statement, or an objective degree of rational belief, given
the evidence.

[edit] Etymology
The word Probability derives from the Latin probabilitas, which can also mean probity, a
measure of the authority of a witness in a legal case in Europe, and often correlated with the
witness's nobility. In a sense, this differs much from the modern meaning of probability, which,
in contrast, is a measure of the weight of empirical evidence, and is arrived at from inductive
reasoning and statistical inference.[2][3]

[edit] History
The scientific study of probability is a modern development. Gambling shows that there has been
an interest in quantifying the ideas of probability for millennia, but exact mathematical
descriptions arose much later. There are reasons of course, for the slow development of the
mathematics of probability. Whereas games of chance provided the impetus for the mathematical
study of probability, fundamental issues are still obscured by the superstitions of gamblers.[4]
According to Richard Jeffrey, "Before the middle of the seventeenth century, the term 'probable'
(Latin probabilis) meant approvable, and was applied in that sense, univocally, to opinion and to
action. A probable action or opinion was one such as sensible people would undertake or hold, in
the circumstances."[5] However, in legal contexts especially, 'probable' could also apply to
propositions for which there was good evidence.[6]

Aside from elementary work by Girolamo Cardano in the 16th century, the doctrine of
probabilities dates to the correspondence of Pierre de Fermat and Blaise Pascal (1654).
Christiaan Huygens (1657) gave the earliest known scientific treatment of the subject. Jakob
Bernoulli's Ars Conjectandi (posthumous, 1713) and Abraham de Moivre's Doctrine of Chances
(1718) treated the subject as a branch of mathematics.[7] See Ian Hacking's The Emergence of
Probability and James Franklin's The Science of Conjecture for histories of the early
development of the very concept of mathematical probability.

The theory of errors may be traced back to Roger Cotes's Opera Miscellanea (posthumous,
1722), but a memoir prepared by Thomas Simpson in 1755 (printed 1756) first applied the theory
to the discussion of errors of observation. The reprint (1757) of this memoir lays down the
axioms that positive and negative errors are equally probable, and that certain assignable limits
define the range of all errors. Simpson also discusses continuous errors and describes a
probability curve.

Pierre-Simon Laplace (1774) first tried to deduce a rule for combining observations from the
principles of the theory of probabilities. He represented the law of probability of errors by a
curve y = φ(x), x being any error and y its probability, and laid down three properties of this
curve:

1. It is symmetric as to the y-axis;

2. The x-axis is an asymptote, the probability of the error being 0;
3. The area enclosed is 1, it being certain that an error exists.

He also provided, in 1781, a formula for the law of facility of error (a term Lagrange used in
1774), but it led to unmanageable equations. Daniel Bernoulli (1778) introduced the principle of
the maximum product of the probabilities of a system of concurrent errors.

Adrien-Marie Legendre (1805) developed the method of least squares, and introduced it in his
Nouvelles méthodes pour la détermination des orbites des comètes (New Methods for
Determining the Orbits of Comets). In ignorance of Legendre's contribution, an Irish-American
writer, Robert Adrain, editor of "The Analyst" (1808), first deduced the law of facility of error,

h being a constant depending on precision of observation, and c a scale factor ensuring that the
area under the curve equals 1. He gave two proofs, the second being essentially the same as John
Herschel's (1850). Gauss gave the first proof that seems to have been known in Europe (the third
after Adrain's) in 1809. Further proofs were given by Laplace (1810, 1812), Gauss (1823), James
Ivory (1825, 1826), Hagen (1837), Friedrich Bessel (1838), W. F. Donkin (1844, 1856), and
Morgan Crofton (1870). Other contributors were Ellis (1844), De Morgan (1864), Glaisher
(1872), and Giovanni Schiaparelli (1875). Peters's (1856) formula for r, the probable error of a
single observation, is well known.

In the nineteenth century authors on the general theory included Laplace, Sylvestre Lacroix
(1816), Littrow (1833), Adolphe Quetelet (1853), Richard Dedekind (1860), Helmert (1872),
Hermann Laurent (1873), Liagre, Didion, and Karl Pearson. Augustus De Morgan and George
Boole improved the exposition of the theory.

Andrey Markov introduced the notion of Markov chains (1906), which played an important role
in stochastic processes theory and its applications. The modern theory of probability based on the
measure theory was developed by Andrey Kolmogorov (1931).

On the geometric side (see integral geometry) contributors to The Educational Times were
influential (Miller, Crofton, McColl, Wolstenholme, Watson, and Artemas Martin).

Further information: History of probability

Further information: History of statistics

[edit] Theory
Main article: Probability theory

Like other theories, the theory of probability is a representation of probabilistic concepts in

formal terms—that is, in terms that can be considered separately from their meaning. These
formal terms are manipulated by the rules of mathematics and logic, and any results are
interpreted or translated back into the problem domain.

There have been at least two successful attempts to formalize probability, namely the
Kolmogorov formulation and the Cox formulation. In Kolmogorov's formulation (see probability
space), sets are interpreted as events and probability itself as a measure on a class of sets. In
Cox's theorem, probability is taken as a primitive (that is, not further analyzed) and the emphasis
is on constructing a consistent assignment of probability values to propositions. In both cases, the
laws of probability are the same, except for technical details.

There are other methods for quantifying uncertainty, such as the Dempster-Shafer theory or
possibility theory, but those are essentially different and not compatible with the laws of
probability as usually understood.

[edit] Applications
Probability theory is applied in everyday life in risk assessment and in trade on commodity
markets. Governments typically apply probabilistic methods in environmental regulation, where
it is called "pathway analysis," often measuring well-being using methods that are stochastic in
nature, and choosing projects to undertake based on statistical analyses of their probable effect
on the population as a whole.

A good example is the effect of the perceived probability of any widespread Middle East conflict
on oil prices—which have ripple effects in the economy as a whole. An assessment by a
commodity trader that a war is more likely vs. less likely sends prices up or down, and signals
other traders of that opinion. Accordingly, the probabilities are not assessed independently nor
necessarily very rationally. The theory of behavioral finance emerged to describe the effect of
such groupthink on pricing, on policy, and on peace and conflict.[8]

It can reasonably be said that the discovery of rigorous methods to assess and combine
probability assessments has profoundly affected modern society. Accordingly, it may be of some
importance to most citizens to understand how odds and probability assessments are made, and
how they contribute to reputations and to decisions, especially in a democracy.

Another significant application of probability theory in everyday life is reliability. Many

consumer products, such as automobiles and consumer electronics, use reliability theory in
product design to reduce the probability of failure. Failure probability may influence a
manufacture's decisions on a product's warranty.[9]

[edit] Mathematical treatment

Consider an experiment that can produce a number of results. The collection of all results is
called the sample space of the experiment. The power set of the sample space is formed by
considering all different collections of possible results. For example, rolling a die can produce
six possible results. One collection of possible results give an odd number on the die. Thus, the
subset {1,3,5} is an element of the power set of the sample space of die rolls. These collections
are called "events." In this case, {1,3,5} is the event that the die falls on some odd number. If the
results that actually occur fall in a given event, the event is said to have occurred.

A probability is a way of assigning every event a value between zero and one, with the
requirement that the event made up of all possible results. (In our example, the event
{1,2,3,4,5,6}) is assigned a value of one.) To qualify as a probability, the assignment of values
must satisfy the requirement that if you look at a collection of mutually exclusive events (events
with no common results, e.g., the events {1,6}, {3}, and {2,4} are all mutually exclusive), the
probability that at least one of the events will occur is given by the sum of the probabilities of all
the individual events.[10]

The probability of an event A is written as P(A), p(A) or Pr(A).[11] This mathematical definition of
probability can extend to infinite sample spaces, and even uncountable sample spaces, using the
concept of a measure.

The opposite or complement of an event A is the event [not A] (that is, the event of A not
occurring); its probability is given by P(not A) = 1 - P(A).[12] As an example, the chance of not
rolling a six on a six-sided die is 1 – (chance of rolling a six) . See
Complementary event for a more complete treatment.

If both events A and B occur on a single performance of an experiment, this is called the
intersection or joint probability of A and B, denoted as . If two events, A and B are
independent then the joint probability is

[13]
for example, if two coins are flipped the chance of both being heads is

If either event A or event B or both events occur on a single performance of an experiment this is
called the union of the events A and B denoted as . If two events are mutually
exclusive then the probability of either occurring is

For example, the chance of rolling a 1 or 2 on a six-sided die is

If the events are not mutually exclusive then

For example, when drawing a single card at random from a regular deck of cards, the chance of
getting a heart or a face card (J,Q,K) (or one that is both) is , because of
the 52 cards of a deck 13 are hearts, 12 are face cards, and 3 are both: here the possibilities
included in the "3 that are both" are included in each of the "13 hearts" and the "12 face cards"
but should only be counted once.

Conditional probability is the probability of some event A, given the occurrence of some other
event B. Conditional probability is written P(A|B), and is read "the probability of A, given B". It
is defined by

[14]

If P(B) = 0 then is undefined. Note that in this case A and B are independent.

Summary of probabilities
Event Probability
A
 not A

A or B

A and B

A given B

[edit] Relation to randomness

Main article: Randomness

In a deterministic universe, based on Newtonian concepts, there is no probability if all conditions

are known. In the case of a roulette wheel, if the force of the hand and the period of that force are
known, the number on which the ball will stop would be a certainty. Of course, this also assumes
knowledge of inertia and friction of the wheel, weight, smoothness and roundness of the ball,
variations in hand speed during the turning and so forth. A probabilistic description can thus be
more useful than Newtonian mechanics for analyzing the pattern of outcomes of repeated rolls of
roulette wheel. Physicists face the same situation in kinetic theory of gases, where the system,
while deterministic in principle, is so complex (with the number of molecules typically the order
of magnitude of Avogadro constant 6.02·1023) that only statistical description of its properties is
feasible.

A revolutionary discovery of 20th century physics was the random character of all physical
processes that occur at sub-atomic scales and are governed by the laws of quantum mechanics.
The wave function itself evolves deterministically as long as no observation is made, but,
according to the prevailing Copenhagen interpretation, the randomness caused by the wave
function collapsing when an observation is made, is fundamental. This means that probability
theory is required to describe nature. Others never came to terms with the loss of determinism.
Albert Einstein famously remarked in a letter to Max Born: Jedenfalls bin ich überzeugt, daß der
Alte nicht würfelt. (I am convinced that God does not play dice). Although alternative viewpoints
exist, such as that of quantum decoherence being the cause of an apparent random collapse, at
present there is a firm consensus among physicists that probability theory is necessary to
describe quantum phenomena.[15]

[edit] See also

Logic portal
Main article: Outline of probability

• Black Swan theory

• Calculus of predispositions
 • Chance (disambiguation)
• Class membership probabilities
• Decision theory
• Equiprobable
• Fuzzy measure theory
• Game theory
• Gaming mathematics
• Information theory
• Important publications in probability
• Measure theory
• Negative probability
• Probabilistic argumentation
• Probabilistic logic
• Random fields
• Random variable
• List of scientific journals in probability
• List of statistical topics
• Stochastic process
• Wiener process

[edit] Notes
1. ^ The Logic of Statistical Inference, Ian Hacking, 1965
2. ^ The Emergence of Probability: A Philosophical Study of Early Ideas about Probability,
Induction and Statistical Inference, Ian Hacking, Cambridge University Press, 2006,
ISBN 0521685575, 9780521685573
3. ^ The Cambridge History of Seventeenth-century Philosophy, Daniel Garber, 2003
4. ^ Freund, John. “Introduction to Probability”. 1973, p. 1.
5. ^ Jeffrey, R.C., Probability and the Art of Judgment, Cambridge University Press.
(1992). pp. 54-55 . ISBN 0-521-39459-7
6. ^ Franklin, J., The Science of Conjecture: Evidence and Probability Before Pascal, Johns
Hopkins University Press. (2001). pp. 22, 113, 127
7. ^ Ivancevic, Vladimir; Tijana Ivancevic. "Quantum Leap". 2008. p 16
8. ^ Singh, Laurie. "Whither Efficient Markets? Efficient Market Theory and Behavioral
Finance". The Finance Professionals' Post, 2010.
9. ^ Gorman, Michael. "Management Insights". Management Science, 2011.
10. ^ Ross, Sheldon. A First course in Probability, 8th Edition. Page 26-27.
11. ^ Olofsson, Peter. (2005) Page 8.
12. ^ Olofsson, page 9
13. ^ Olofsson, page 35.
14. ^ Olofsson, page 29.
15. ^ Burgi, Mark. ” Interpretations of Negative Probabilities”. 2009, p. 1.

[edit] References
 • Kallenberg, O. (2005) Probabilistic Symmetries and Invariance Principles. Springer
-Verlag, New York. 510 pp. ISBN 0-387-25115-4
• Kallenberg, O. (2002) Foundations of Modern Probability, 2nd ed. Springer Series in
Statistics. 650 pp. ISBN 0-387-95313-2
• Olofsson, Peter (2005) Probability, Statistics, and Stochastic Processes, Wiley-
Interscience. 504 pp ISBN 0-471-67969-0.

[edit] Quotations
• Damon Runyon, "It may be that the race is not always to the swift, nor the battle to the
strong—but that is the way to bet."
• Pierre-Simon Laplace "It is remarkable that a science which began with the consideration
of games of chance should have become the most important object of human
knowledge." Théorie Analytique des Probabilités, 1812.
• Richard von Mises "The unlimited extension of the validity of the exact sciences was a
characteristic feature of the exaggerated rationalism of the eighteenth century" (in
reference to Laplace). Probability, Statistics, and Truth, p 9. Dover edition, 1981
(republication of second English edition, 1957).

[edit] External links

This article includes a list of references, related reading or external links, but its sources
remain unclear because it lacks inline citations. Please improve this article by introducing
more precise citations where appropriate. (September 2008)
Wikibooks has a book on the topic of
Probability

• Virtual Laboratories in Probability and Statistics (Univ. of Ala.-Huntsville)

• Probability on In Our Time at the BBC. (listen now)
• Probability and Statistics EBook
• Edwin Thompson Jaynes. Probability Theory: The Logic of Science. Preprint:
Washington University, (1996). — HTML index with links to PostScript files and PDF
(first three chapters)
• People from the History of Probability and Statistics (Univ. of Southampton)
• Probability and Statistics on the Earliest Uses Pages (Univ. of Southampton)
• Earliest Uses of Symbols in Probability and Statistics on Earliest Uses of Various
Mathematical Symbols
• A tutorial on probability and Bayes’ theorem devised for first-year Oxford University
students
• pdf file of An Anthology of Chance Operations (1963) at UbuWeb
• Probability Theory Guide for Non-Mathematicians
• Understanding Risk and Probability with BBC raw
• Introduction to Probability - eBook, by Charles Grinstead, Laurie Snell Source (GNU
Free Documentation License)
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Heteroscedasticity
From Wikipedia, the free encyclopedia
This article only describes one highly specialized aspect of its associated subject.
Please help improve this article by adding more general information. The talk page may
contain suggestions. (October 2009)

Plot with random data showing heteroscedasticity.

In statistics, a sequence of random variables is heteroscedastic, or heteroskedastic, if the

random variables have different variances. The term means "differing variance" and comes from
the Greek "hetero" ('different') and "skedasis" ('dispersion'). In contrast, a sequence of random
variables is called homoscedastic if it has constant variance.

Suppose there is a sequence of random variables {Yt}t=1n and a sequence of vectors of random
variables, {Xt}t=1n. In dealing with conditional expectations of Yt given Xt, the sequence {Yt}t=1n is
said to be heteroskedastic if the conditional variance of Yt given Xt, changes with t. Some authors
refer to this as conditional heteroscedasticity to emphasize the fact that it is the sequence of
conditional variance that changes and not the unconditional variance. In fact it is possible to
observe conditional heteroscedasticity even when dealing with a sequence of unconditional
homoscedastic random variables, however, the opposite does not hold.

When using some statistical techniques, such as ordinary least squares (OLS), a number of
assumptions are typically made. One of these is that the error term has a constant variance. This
might not be true even if the error term is assumed to be drawn from identical distributions.

For example, the error term could vary or increase with each observation, something that is often
the case with cross-sectional or time series measurements. Heteroscedasticity is often studied as
part of econometrics, which frequently deals with data exhibiting it. White's influential paper
(White 1980) used "heteroskedasticity" instead of "heteroscedasticity" whereas subsequent
Econometrics textbooks such as Gujarati et al. Basic Econometrics (2009) use
"heteroscedasticity."

With the advent of robust standard errors allowing for inference without specifying the
conditional second moment of error term, testing conditional homoscedasticity is not as
important as in the past.[citation needed]

The econometrician Robert Engle won the 2003 Nobel Memorial Prize for Economics for his
studies on regression analysis in the presence of heteroscedasticity, which led to his formulation
of the Autoregressive conditional heteroskedasticity (ARCH) modeling technique.

Contents
[hide]

• 1 Consequences
• 2 Detection
• 3 Fixes
• 4 Examples
• 5 See also
• 6 References

• 7 Further reading

[edit] Consequences
Heteroscedasticity does not cause ordinary least squares coefficient estimates to be biased,
although it can cause ordinary least squares estimates of the variance (and, thus, standard errors)
of the coefficients to be biased, possibly above or below the true or population variance. Thus,
regression analysis using heteroscedastic data will still provide an unbiased estimate for the
relationship between the predictor variable and the outcome, but standard errors and therefore
inferences obtained from data analysis are suspect. Biased standard errors lead to biased
inference, so results of hypothesis tests are possibly wrong. An example of the consequence of
biased standard error estimation which OLS will produce if heteroskedasticity is present, is that a
researcher may find at a selected confidence level, results compelling against the rejection of a
null hypothesis as statistically significant when that null hypothesis was in fact uncharacteristic
of the actual population (i.e., make a type I error).

It is widely known that, under certain assumptions, the OLS estimator has a normal asymptotic
distribution when properly normalized and centered (even when the data does not come from a
normal distribution). This result is used to justify using a normal distribution, or a chi square
distribution (depending on how the test statistic is calculated), when conducting a hypothesis
test. This holds even under heteroscedasticity. More precisely, the OLS estimator in the presence
of heteroscedasticity is asymptotically normal, when properly normalized and centered, with a
variance-covariance matrix that differs from the case of homoscedasticity. White (1980) [1]
proposed a consistent estimator for the variance-covariance matrix of the asymptotic distribution
of the OLS estimator. This validates the use of hypothesis testing using OLS estimators and
White's variance-covariance estimator under heteroscedasticity.

Heteroscedasticity is also a major practical issue encountered in ANOVA problems.[2] The F test
can still be used in some circumstances.[3]

However, as Gujarati et al. noted, (Gujarati et al. 2009, p. 400)[4] students in Econometrics should
not overreact to heteroskedasticity. John Fox (the author of Applied Regression Analysis) wrote,
"unequal error variance is worth correcting only when the problem is severe." (Fox 1997, p. 306)
[5]
(Cited in Gujarati et al. 2009, p. 400) And another word of caution from Mankiw,
"heteroscedasticity has never been a reason to throw out an otherwise good model." (Mankiw
1990, p. 1648)[6] (Cited in Gujarati et al. 2009, p. 400)

[edit] Detection

Absolute value of residuals for simulated first order Heteroskedastic data.

There are several methods to test for the presence of heteroscedasticity:

• Park test (1966)[7]

• Glejser test (1969)
• White test (1980)
• Breusch–Pagan test
• Goldfeld–Quandt test
• Cook–Weisberg test
• Harrison–McCabe test
• Spearman rank correlation coefficient
• Brown–Forsythe test
• Levene test

These methods consist, in general, in performing hypothesis tests. These tests consist of a
statistic (a mathematical expression), a hypothesis that is going to be tested (the null hypothesis),
an alternative hypothesis, and a distributional statement about the statistic (the mathematical
expression).

Many introductory statistics and econometrics books, for pedagogical reasons, present these tests
under the assumption that the data set in hand comes from a normal distribution. A great
misconception is the thought that this assumption is necessary; however, in most cases, this
assumption can be relaxed by using asymptotic distribution theory (a.k.a. asymptotic theory).

Most of the methods of detecting heteroscedasticity presented here can be used even when the
data do not come from a normal distribution. This is done by realizing that the distributional
statement about the statistic (the mathematical expression) can be approximated by using
asymptotic theory[citation needed].

[edit] Fixes
There are three common corrections for heteroscedasticity:

• View Logged data. Unlogged series that are growing exponentially often appear to have
increasing variability as the series rises over time. The variability in percentage terms
may, however, be rather stable.
• Use a different specification for the model (different X variables, or perhaps non-linear
transformations of the X variables).
• Apply a weighted least squares estimation method, in which OLS is applied to
transformed or weighted values of X and Y. The weights vary over observations,
depending on the changing error variances.
• Heteroscedasticity-consistent standard errors (HCSE), while still biased, improve upon
OLS estimates (White 1980). HCSE is a consistent estimator of standard errors in
regression models with heteroskedasticity. The White method corrects for
heteroscedasticity without altering the values of the coefficients. This method may be
superior to regular OLS because if heteroscedasticity is present it corrects for it, however,
if the data is homoscedastistic, the standard errors are equivalent to conventional standard
errors estimated by ols. Several modifications of the White method of computing
heteroscedasticity-consistent standard errors have been proposed as corrections with
superior finite sample properties.

[edit] Examples
Heteroscedasticity often occurs when there is a large difference among the sizes of the
observations.

• A classic example of heteroscedasticity is that of income versus expenditure on meals. As

one's income increases, the variability of food consumption will increase. A poorer
person will spend a rather constant amount by always eating less expensive food; a
wealthier person may occasionally buy inexpensive food and at other times eat expensive
meals. Those with higher incomes display a greater variability of food consumption.
 • Imagine you are watching a rocket take off nearby and measuring the distance it has
traveled once each second. In the first couple of seconds your measurements may be
accurate to the nearest centimeter, say. However, 5 minutes later as the rocket recedes
into space, the accuracy of your measurements may only be good to 100 m, because of
the increased distance, atmospheric distortion and a variety of other factors. The data you
collect would exhibit heteroscedasticity.

[edit] See also

• Kurtosis (peakedness)
• Breusch–Pagan test of heteroscedasticity of the residuals of a linear regression
• Regression analysis
• homoscedasticity
• Autoregressive conditional heteroscedasticity (ARCH)
• White test
• Heteroscedasticity-consistent standard errors

[edit] References
1. ^ White, Halbert (1980). "A heteroscedasticity-consistent covariance matrix
estimator and a direct test for heteroscedasticity". Econometrica 48 (4): 817–838.
doi:10.2307/1912934. JSTOR 1912934.
2. ^ Gamage, Jinadasa; Weerahandi, Sam (1998). "Size performance of some tests
in one-way anova". Communications in Statistics - Simulation and Computation 27 (3):
625. doi:10.1080/03610919808813500. ISBN 0919808813500.
3. ^ Bathke, A (2004). "The ANOVA F test can still be used in some balanced
designs with unequal variances and nonnormal data". Journal of Statistical Planning and
Inference 126 (2): 413. doi:10.1016/j.jspi.2003.09.010.
4. ^ Gujarati, D. N. & Porter, D. C. (2009) Basic Econometrics. Ninth Edition.
McGraw-Hill.
5. ^ Fox, J. (1997) Applied Regression Analysis, Linear Models, and Related
Methods. California:Sage Publications.
6. ^ Mankiw, N. G. (1990) A Quick Refresher Course in Macroeconomics. Journal
of Economics Literature. Vol. XXVIII, December.
7. ^ R. E. Park (1966). "Estimation with Heteroscedastic Error Terms".
Econometrica 34 (4): 888. doi:10.2307/1910108. JSTOR 1910108.

[edit] Further reading

Most statistics textbooks will include at least some material on heteroscedasticity. Some
examples are:

• Studenmund AH. Using Econometrics (2nd ed.). ISBN 0-673-52125-7. (devotes a

chapter to heteroscedasticity)
 • Verbeek, Marno (2004): A Guide to Modern Econometrics, 2. ed., Chichester: John
Wiley & Sons, 2004, pages
• Greene, W.H. (1993), Econometric Analysis, Prentice–Hall, ISBN 0-13-013297-7, an
introductory but thorough general text, considered the standard for a pre-doctorate
university Econometrics course;
• Hamilton, J.D. (1994), Time Series Analysis, Princeton University Press ISBN 0-691-
04289-6, the text of reference for historical series analysis; it contains an introduction to
ARCH models.
• Vinod, H.D. (2008): Hands On Intermediate Econometrics Using R: Templates for
Extending Dozens of Practical Examples. ISBN 10-981-281-885-5 (Section 2.8 provides
R snippets) World Scientific Publishers: Hackensack, NJ .
• White, Halbert (1980). "A heteroscedasticity-Consistent Covariance Matrix Estimator
and a Direct Test for Heteroscedasticity". Econometrica 48 (4): 817–838.
doi:10.2307/1912934. JSTOR 1912934.

Special subjects

• Glejser test: Furno, Marilena (2005). "The Glejser Test and the Median Regression".
Sankhya – the Indian Journal of Statistics, Special Issue on Quantile Regression and
Related Methods 67 (2): 335–358. (work done at Universita di Cassino, Italy, 2005)
• heteroscedasticity in QSAR Modeling

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Durbin–Watson statistic
From Wikipedia, the free encyclopedia

In statistics, the Durbin–Watson statistic is a test statistic used to detect the presence of
autocorrelation (a relationship between values separated from each other by a given time lag) in
the residuals (prediction errors) from a regression analysis. It is named after James Durbin and
Geoffrey Watson. However, the small sample distribution of this ratio was derived in a path-
breaking article by John von Neumann (von Neumann, 1941). Durbin and Watson (1950, 1951)
applied this statistic to the residuals from least squares regressions, and developed bounds tests
for the null hypothesis that the errors are serially independent (not autocorrelated) against the
alternative that they follow a first order autoregressive process. Later, John Denis Sargan and
Alok Bhargava developed several von Neumann–Durbin–Watson type test statistics for the null
hypothesis that the errors on a regression model follow a process with a unit root against the
alternative hypothesis that the errors follow a stationary first order autoregression (Sargan and
Bhargava, 1983).

Contents
[hide]

• 1 Computing and interpreting the Durbin–Watson statistic

• 2 Durbin h-statistic
• 3 Durbin–Watson test for panel data
• 4 Implementations in statistics packages
• 5 See also
• 6 Notes
• 7 References

• 8 External links

[edit] Computing and interpreting the Durbin–Watson

statistic
If et is the residual associated with the observation at time t, then the test statistic is

where T is the number of observations. Since d is approximately equal to 2(1 − r), where r is the
sample autocorrelation of the residuals,[1] d = 2 indicates no autocorrelation. The value of d
always lies between 0 and 4. If the Durbin–Watson statistic is substantially less than 2, there is
evidence of positive serial correlation. As a rough rule of thumb, if Durbin–Watson is less than
1.0, there may be cause for alarm. Small values of d indicate successive error terms are, on
average, close in value to one another, or positively correlated. If d > 2 successive error terms
are, on average, much different in value to one another, i.e., negatively correlated. In regressions,
this can imply an underestimation of the level of statistical significance.

To test for positive autocorrelation at significance α, the test statistic d is compared to lower
and upper critical values (dL,α and dU,α):

• If d < dL,α, there is statistical evidence that the error terms are positively
autocorrelated.
• If d > dU,α, there is statistical evidence that the error terms are not
positively autocorrelated.
• If dL,α < d < dU,α, the test is inconclusive.

To test for negative autocorrelation at significance α, the test statistic (4 − d) is compared to

lower and upper critical values (dL,α and dU,α):

• If (4 − d) < dL,α, there is statistical evidence that the error terms are
negatively autocorrelated.
• If (4 − d) > dU,α, there is statistical evidence that the error terms are not
negatively autocorrelated.
• If dL,α < (4 − d) < dU,α, the test is inconclusive.

The critical values, dL,α and dU,α, vary by level of significance (α), the number of observations,
and the number of predictors in the regression equation. Their derivation is complex—
statisticians typically obtain them from the appendices of statistical texts.

An important note is that the Durbin–Watson statistic, while displayed by many regression
analysis programs, is not relevant in many situations. For instance, if the error distribution is not
normal, if there is higher-order autocorrelation, or if the dependent variable is in a lagged form as
an independent variable, this is not an appropriate test for autocorrelation. A suggested test that
does not have these limitations is the Breusch–Godfrey (serial correlation LM) Test.

[edit] Durbin h-statistic

The Durbin–Watson statistic is biased for autoregressive moving average models, so that
autocorrelation is underestimated. But for large samples one can easily compute the unbiased
normally distributed h-statistic:

using the Durbin–Watson statistic d and the estimated variance

of the regression coefficient of the lagged dependent variable, provided

[edit] Durbin–Watson test for panel data

For panel data this statistic was generalized as follows by Alok Bhargava et al. (1982):

If ei, t is the residual from an OLS regression with fixed effects for each panel i, associated
with the observation in panel i at time t, then the test statistic is

This statistic can be compared with tabulated rejection values [see Alok Bhargava et al. (1982),
page 537]. These values are calculated dependent on T (length of the balanced panel—time
periods the individuals were surveyed), K (number of regressors) and N (number of individuals
in the panel). This test statistic can also be used for testing the null hypothesis of a unit root
against stationary alternatives in fixed effects models using another set of bounds (Tables V and
VI) tabulated by Alok Bhargava et al. (1982).

[edit] Implementations in statistics packages

1. R: the dwtest function in the lmtest package.
2. MATLAB: the dwtest function in the Statistics Toolbox.
3. Mathematica: the Durbin–Watson (d) statistic is included as an option in the
LinearModelFit function.
4. SAS: Is a standard output when using proc model and is an option (dw) when using proc
reg.
5. Stata: the command -estat dwatson-, following -regress- in times series data. Engle's LM
test for autoregressive conditional heteroskedasticity (ARCH), a test for time-dependent
volatility, the Breusch–Godfrey test, and Durbin's alternative test for serial correlation are
 also available. All (except -dwatson-) tests separately for higher-order serial correlations.
The Breusch–Godfrey test and Durbin's alternative test also allow regressors that are not
strictly exogenous.
6. EXCEL: although Microsoft Excel 2007 does not have a specific Durbin–Watson
function, the d-statistic may be calculated using
"=SUMXMY2(x_array,y_array)/SUMSQ(array)"

[edit] See also

• Time-series regression
• ACF / PACF

[edit] Notes
1. ^ Gujarati (2003) p. 469

[edit] References
• Bhargava, Alok, Franzini, L., Narendranathan, W. (1982): "Serial Correlation and the
Fixed Effects Model". Review of Economic Studies, 49, p. 533–549.
• Durbin, J., and Watson, G. S. (1950) "Testing for Serial Correlation in Least Squares
Regression, I." Biometrika 37, 409–428.
• Durbin, J., and Watson, G. S. (1951) "Testing for Serial Correlation in Least Squares
Regression, II." Biometrika 38, 159–179.
• Gujarati, D.N. (2003) Basic econometrics, 4th ed., Boston, McGraw–Hill
• Gujarati, Damodar N. (1995): Basic Econometrics, 3. ed., New York et al.: McGraw–
Hill, 1995, page 605f.
• Sargan, J.D. and Alok Bhargava (1983). "Testing residuals from least squares regression
for being generated by the Gaussian random walk". Econometrica, 51, p. 153–174.
• Verbeek, Marno (2004): A Guide to Modern Econometrics, 2. ed., Chichester: John
Wiley & Sons, 2004, Seite 102f.
• von Neumann, John. (1941). "Distribution of the ratio of the mean square successive
difference to the variance". Annals of Mathematical Statistics, 12, 367–395.

[edit] External links

• Table for high n and k

Categories: Econometrics | Statistical tests | Time series analysis

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