Implement the Durbin-Watson test in the regression. What is the test statistic? What conclusion do you draw?

INSTRUCTIONS TO CANDIDATES

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Topics covered in this lab:

• Effect of serial correlation

• How to detect serial correlation

• How to implement Cochrane-Orcutt method

• How to estimate AR model by MLE

Data Description

Data lab9.txt contains 49 observations on inflation and unemployment from 1948 to 1996. There are only 2 variables in the data, the first one is unem, being the unemployment rate, and the second one is inf, being the inflation rate.

Tasks

1. Read in the data from the external text file.

2. Regress inf on unem using reg procedure. What is the coefficient of unem? Is it significant?

3. Implement the Durbin-Watson test in the regression. What is the test statistic? What conclusion do you draw?

4. Implement the Durbin-Watson test using autoreg procedure. What is the test statistic and what is the corresponding p-value? Now what do you conclude regarding serial correlation?

5. Use the Cochrane-Orcutt method to refit the model. What is the coefficient of unem? Is it significant?

6. Use autoreg procedure in SAS to refit the model by MLE, allowing AR(1) error. What is the coefficient of unem? Is it significant?

Exercise

1. We only implement the Cochrane-Orcutt method for one round. Try to implement it for a second round, or even a third round.

 

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