1(a) The Durbin Watson (d) statistic is defined as
Where u t is the OLS residual. Explain what hypothesis d tests.
(b) Show that if the null hypothesis is true, d is approximately equal to 2.
(c) The following equation was estimated by OLS on UK quarterly data
Ct = − 370.87 + 0.916YDt + u t t = 1,2,..,T
R2= 0.997, F = 37,986.0, d = 1.237, T = 111, standard errors in
brackets, u t is the least squares residual, Ct is expenditure on consumption goods and YDt is disposable income.
Calculate a 95% confidence interval for the coefficient of YDt.
(d) Give the assumptions on which your confidence interval in (c) is based. Is there any evidence given above that these assumptions are violated? Explain and discuss the implications, if any, for your confidence interval.
The solution provides steps to determining validity of hypotheses and includes a graph in the word document.