Lagged Regression Residuals and Serial-Correlation Tests Author(s): Jan G. De Gooijer and Ian B.

MacNeill Reviewed work(s): Source: Journal of Business & Economic Statistics, Vol. 17, No. 2 (Apr., 1999), pp. 236-247 Published by: American Statistical Association Stable URL: http://www.jstor.org/stable/1392478 . Accessed: 21/01/2012 15:23
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Lagged

Regression

Residuals

and

Serial-Correlation Tests
Jan G. DE GOOIJER of of The Netherlands Department EconomicStatistics, University Amsterdam,1018 WB Amsterdam,

(jandeg@fee. uva.nl)
lan B. MACNEILL of of London,OntarioN6A 5B9, Canada Sciences, University WesternOntario, Department Statisticaland Actuarial

(macneill@stats.uwo.ca).
A new familyof statisticsis proposed test for the presence serialcorrelation linearregresto of in sion models.The tests are basedon partialsumsof laggedcross-products regression residuals of in that definea class of interesting Gaussian processes.These processesare characterized terms of regressorfunctions,the serial-correlation the of structure, distribution the noise process,and of the orderof the lag of the cross-products residuals.It is shownthat these four factorsaffect for the laggedresidualprocessesindependently. distributional resultsare presented Large-sample or from a range test statisticsunderthe null hypothesisof no serial correlation for alternatives results of of interesting to hypotheses.Some indication the circumstances which the asymptotic and situations of those to whichthey shouldbe appliedwith some caution applyin finite-sample a of tests arealso areobtained study.Tablesof selectedquantiles the proposed through simulation with two examplestakenfrom the empiricalliterature. is also It given. The tests are illustrated that tools to gaininsightinto the processesbe used as diagnostic proposed plotsof laggedresidual derivedfromregression fits. of correlation structure residuals KEY WORDS: Cram&r-von (4th cumulant) Mises; Distribution effects;Kolmogorov-Smirnov; Serial-correlation effects. residuals; Lag effects;Partialsums;Regression

Figure 1 presentsplots of sequencesof partialsums of Early work on testing for the presenceof serial correleastsquares (for lation in linear regressionmodels includes the celebrated cross-products particular lags) of ordinary residuals an empiricalseries.Statistics for articles of Durbinand Watson(DW) (1950, 1951). They (OLS)regression focused on the possibility that the errorsin a linear re- such as DW1 and DW4 are based only on the last point of autoregressive the line graph,whereasthe test statisticsproposedlaterare by gressionmodelaregenerated a first-order of basedon the whole sequenceof partialsums.Perusal the [AR(l)] process.This resultedin the so-calledDW1 statislast termof the sequence as tic, which nowadaysmay be regarded the most popular figurerevealsthatuse of only the in test for serial correlation econometrics. Duringthe past could give a distortedpictureof the natureof the serial in four decades,the DW1 statistichas been the subjectof nu- correlation the data. Clearly,the significantincreasein the partialsums at lag k = 1 nearthe end of the sequence merous investigations.The importanceof testing for the sein serialcorrelation linearregres- suggests stronglythe presenceof (positive)first-order presenceof higher-order of the series.The but only for part sion analysis using quarterlyor monthlytime series was rial correlation, perhaps of Wal- changingpatterns partialsums at lags k = 3 and 5, howstressedby ThomasandWallis(1971). Subsequently, serialcorlis (1972) proposedan analogueof the DW1 statisticto test ever,seem to indicatesome formof higher-order relationalso. Plots of the laggedresidualprocessesdefined the case in whichthe errorsfollow a simpleAR(4)process. can of In this articlewe proposea new family of test statistics by the partialsumof laggedcross-products residuals of the time sestructure thatcanbe usedto test againstvariousformsof serialcorre- provideinsightsinto the correlation ries that cannotbe revealedby a test statistic.Hence, it is lation.The tests are basedon partialsums of lagged crossthat such plots be addedto the diagnostictools productsof regressionresiduals.These test statisticsmake proposed used when modelingeconomictime series. use of the entire set of partialsums ratherthan only the to In this articlewe first presenta unifiedapproach the the end pointof the series,representing total sum, as in the cases of the DW1 and DW4 statistics.This allows for test- problemof testingfor selectedspecifictypes of serialcorperhapswhere relationin least squaresregressionresiduals.The resultant ing against more complicatedalternatives, dis- familyof tests will be definedin termsof sequencesof paroccurin the series.Large-sample changesof parameters residuals of resultsare obtainedfor the statisticsundervari- tial sumsof laggedcross-products least squares tributional normalized an estimateof theirresidualvariance. Using by which includeseveralclasses of regressor ous alternatives, of distribution the serial-correlation structures, functions, noise process, and orderof the lag of the cross-products. ? 1999 American Statistical Association that Tablesof selectedquantilesareprovided makefor easy Journal of Business & Economic Statistics April 1999, Vol. 17, No. 2 of application the tests.
236

Tests De Gooijerand MacNeill: Lagged Regression Residualsand Serial-Correlation

237

0.5 0.40.3S0.2 -

0.0 0.0 ---0.1 -

I \I

-0.2 2 6 10 14 18 22 26 30 34 38 42 46 50 54 58 62

j = k+ 1, k+ 2, .n

1. Sumsof Cross-productsLagk OLSRegression of Residuals k) = Figure Plotsof Sequencesof Partial R6(,

forResidualsObtainedFromModel(35); n = 62, k = 1, 3, and 5: , k = 1;---,

=k+1e(t)e(t k) Against k = 3; - - -, k = 5.

our tests, moredetailsaboutthe analysisof the datain Figure 1 will be given in Section 4. The plan of this article is as follows. In Section 1, we present the regressionmodel to be consideredand introduce new test statistics.We also define the lagged-crossproduct-of-residuals process and two related processes. The

vector,andxt (t/n) is the (t, 1) compopendentobservation nent of the n x (p + 1) design matrixX. The problemof interestis to test for kth-order serialcorrelation(k < n) using OLSregression residuals. Hence,the aim is to discuss statisticsto test the null hypothesis
Ho:y(k)/-y(0) = 0 for any specific k 5 0, (3)

of large-sample properties these processesare investigated in Section 2. In Section 3, we presentthe resultsof an empiricalpowerstudyof the tests. We also makea comparison withpowerresultsobtained fromothertests for serialcorrelation.In Section4, two empiricaleconomicexampleswill be consideredto illustratethe usefulness of our tests for the presenceof variousforms of serialcorrelation. Section 5 containssome concludingremarks. 1. MODEL ANDTEST STATISTICS

versusthe alternative hypothesis

Ha:7y(k)/7y(0) 0 for any specific k $ 0. (4)

It is well knownthatunderthe null hypothesis(3), 3 is consistently and efficientlyestimatedwith the OLS estimator
b = (X'X)-1X'y from (2).

In the sequel a collection of test statistics is introduced for testing Ho using sequences of partial sums of cross-products lag k OLS residuals.Put x(t/n) = of

Let {u(t)} be a zero-mean, discrete-time, stationary (xo(t/n), x1(t/n),..., xp(t/n)). Let Y(t) = x(t/n)b' denote process, with lag k autocovariancefunction y(k) - the tth fitted value and e(t) - y(t) - (t) the correspondE{u(t)u(t + k)} (jkj < 00c). Consider a collection of non- ing OLS residual.Thensequencesof partialsumsof crossstochastic regressor functions xt (.) (1 = 0, , ... , p) defined productsof lag k OLS regressionresidualsare definedby on the interval[0,1] andwith equispaced observations. The R(j, k) (k + 1 < j < n;j = 1,..., n), where theory extends to the case in which observationsare not equispacedand are on time intervalsof any finite length. (5) L e(t)e(t - k). R(j, k) The collection of regressorfunctionsincludes most func, t=k+l tions used in practiceincludingpolynomialsof all orders and harmonicregressorsof all orders.The standard linear The family of tests we proposeincludesthe following.For k= 1,...,< n, regressionmodel may then be writtenas
p

Ti(k)= xt(t/n)01 + u(t),

n2 R(j, 2) j=k+1
=
j=k+l

y(t) =E

t=

1=0

1,..., n,

(1)

where n > 1. The matrixformulation model (1) is of y = X3 + u, (2)

T2(k)
=

nIn2
up
3n

k) =k+1e(t)e(t k
Et=1

(6)

nZ

e2(t)

(6)

k+l<j<n

nR(j, k) R(n, 0) t=k+l e(t)e(t - k)

E

where u' = (u(1), u(2),...,u(n)), p' = (/3o,/1,. . .,p) iS the parameter vector, y' = (y(1), y(2),.. ., y(n)) is the de-

+supjn k+ l<j:5n Se2

(7=1) t=1

(7)

238

Journalof Business & EconomicStatistics,April1999

T3(k) =

nR(j,k) k+l<j<n R(n,O) sup

2. ASYMPTOTIC NULL DISTRIBUTION 2.1 Conditions

e(t)e(t - k) (8)

sup
k+l<_jn

Sn 3=k+ t=+l
Et=1l

()
inf nR(j, k)
R(n,

and
T4(k) = sup
k+l<j<n

nR(j, k) R(n, 0)

k+l<j.n

0)

To study large-sample distribution theory of the statistics (6)-(9), we impose mild conditionson the noise process u(t). We requirethat the covariancefunctionof the noise processu(t) be absolutelysummable. Thenthe spectraldensityfunctionf(A) = (27r)-1 Ekll<oo e-iAky(k) (A E exists. We also requirethatthe spectraldensitybe [--r, ir]) positive;that is,
f(A) _>a > 0 (A E [-ir, ]) (13)

k+1<_jn

sup

n n Z3=k+1 e(t)e(t - k) 2k

Et=1e2(t)
n Z=k+1 e(t)e(t- k) t=
Zt=1 e2(t) (9)

inf
k+l<j<n

The collection of tests may be enrichedby incorporating weight functionsthat weight parts of the partialsum sequencedifferentlyaccordingto the relative importance attachedby the analystto the variousportionsof the sequence. Applicationof test statisticsrequiresthat their distribu- C,+l(V/l,V2, . I Vn) = cum{u(j + V1),U(j + V2),..., 1 , tion theorybe available.For some of the precedingtests, the criticalregionscannotbe found in the basic statistical u(j + uV), u(j)}. (14) and tabulation the percentilesof the distribution of tables, Stationarityto order n + 1 is implicit in this definition. is required.Finite-sampledistribution theory for the test Second-orderstationarity, together with finitenessof the statistics Tji(k) (i = 1,...,4) is complicated. Asymptotic Note that the firsttwo variance,implies weak stationarity. however. This involvesfirstderivingthe cumulants are theoryis tractable, E{u(j)} and y(k), Il < o00. When necessary limit process for R(j, k). To this end, we define another we assumethatthe cumulants exist andsatisfywhatwe call sequence of stochasticprocesses {O(t,k), t E [0,1]} pos- the Brillingerconditions; namely, sessing continuoussamplepathsby
nl/20(t, k) = R([nt], k) + (nt - [nt])2 V2,. IC,++1(vi1,

for some fixed constanta. Then the process can be expressedeitheras an infinitemovingaverageor as an infinite that autoregression; is, it is invertible. In the sequel,we requirea centrallimit theoremfor time series. Conditionsthat guaranteeconvergencein distribution of n-1/2 j=1 u(j) (t E [0, 1]) to the normalwith zero meanand variance{21rf(0)t} are those given by Brillinger (1973). These conditionsare stated in terms of cumulant functions,which are definedas follows:

", Vj)I< L /

j=1

(1 + u2)

(15)

x e([nt] + 1)e([nt] + 1 - k), (10) by (10) will be called the lagged-cross-product-of-residuals

where [nt] is the integer part of nt. The process defined 2.2 Lagged-Cross-product-of-Errors Process focus of our interestin SecBecausethe process(11) has a nonzeromeanvaluefuncprocess andwill be a principal tion 2. To establishthe limit processfor (10), however,we tion that grows with increasingsample size, we define a of firstexaminethe properties two closely relatedsequences relatedzero-mean process {J(t, k), t E [0,1]} as follows: of stochasticprocesses.The firstis definedas follows:
[nt] nl/2x(t, k) =
j=k+1

for some finite L,, , = 1, ....

?(t, k) = x(t, k) - n1/2 (t u(j)u(j - k)

y(k).

(16)

+ (nt - [nt])2u([nt] + 1)u([nt] + 1 - k), te [0, 1]. (11)

Next we consider the covariance kernel of the process K(s, tlk, n) = cov{2(s, k), 2(t, k)}. We assume that [nt] = j and [ns] = h with h < j. Because JE{2(s, k)2(t, k)} - E{2(h/n, k)2(j/n, k)}l c/n,

For convenience (11) will be referred to as the lagged-crossproduct-of-errors process. It corresponds to (10) but with exact errors instead of OLS residuals. The second sequence of stochastic processes is defined by D(t, k) =
n1/2{X(t,

where c is independent of s, t, and n, for large samples, we need only consider K(h/n, j/nlk). Then

k) - O(t, k)},

[0, 1]. (12)

"- K(
= 1
i=k+1

) E{u(i)u(i - k)u(1)u(l - k)}

I=k+1

It characterizes the effects of regression on the lag k crossproducts of the residual process and will be referred to as the cross-product-of-regression-effectsprocess.

Tests De Gooijerand MacNeill: Lagged Regression Residualsand Serial-Correlation

239

(j - k)(h - k) 2(k) n
-

2.4 Lagged-Cross-product-of-Residuals Process We returnto consideration the lagged-cross-productof of-residualsprocess as definedby (10). Equation(12) de+ cum{u(i)u(i - k)u(l)u(l - k)}. n fines this processin termsof the processesdiscussedin the E i=k+1 l=k+l two previoussubsections.The interestingpoint to note reis Now using argumentssimilarto those of Tang and Mac- gardingthis relationship thatthe normalizations required Neill (1993), it can be shown that, uniformly in s and for 0(t, k) and X(t,k) are differentfrom that for D(t, k). Because x(t, k) - 0(t, k) = n-1/2D(t, k) and because t, K(s, tlk,n) - K,(k, k)min(s,t), where
i=k+l1 =k+l

1S2S

1)+ -y(i1+k)y(i 1- k)

andwhereg(s, t) = x'(s)G-lx(t), with limn-oo n-1(X'X) that = G, assuming G-1 exists.Note thateffectsdueto lags andeffectsdue to nonnormality for disappear largesamples.

K,(k, k') = 2

(1 +

eiA(k+k'))f2(A)

dA + Fl(k)

n-1/2

O<t<l

sup D(t)l -+ 0

where F2(k) = Eljl<-EC4(k, vi,v2). Thus, the two s and {D(t,k), t processes {O(s,k), [0,1]} [0,1]} are if uncorrelated the higher-order cumulants approximately 00 are 0. Of course, this result holds exactly if in addition 3 biE(t- i), = 0, t (17) there is no serial u(t) = +1, ?2, ..., correlationin the noise process and if i=0 s = t = 1 and k = 0; that is, E{((1,0)D(1,0)} = 0. where bo= 1, =o Ibil< oo, andthe innovations e(t) (t = For the class of linear time series (17), we get F2(k) = forma sequenceof iid random variables such 0, ?1, 2,.. .) f = thatE{e(t)}= 0,E(E2(t)}= K2 oo,andcum1{4(t)} K4{27r (0)/a2}{1(k)/U2. < < 41 I4 I1 00. Although this class of processes some- 2.5 Test Statistics is what smaller than the class of stationarytime series satGiven the resultspresentedin Subsection2.4, we char(13) and (15), it includes virtually all commonly acterizethe limit distribution the sequenceof stochastic of isfying used times series models including autoregressivemov- processes{U(t, k), t E [0,1]} definedby ing average(ARMA)models. Now, it may be shown that F1(k) = K4Y2(k)/r4. (20) U(t, k) = 0(t, k) t . 0(1,0) -y(0) 2.3 Cross-product-of-Regression-Effects Process that (13) We now considerthe process {D(t, k), t E [0,1]} as de- Underassumptions and(15) andprovided the spectral densityof the noise processis squareintegrable, can it finedby (12). Assumeconditions(13) and (15). Further asbe shown that (20), when properlynormalized, converges sume that xl (t) (1 = 0, 1,... ,p) are linearly independent weakly to a Gaussianprocess {Bk(t), t E [0,1]}. That is, nonstochastic regressorfunctionsof time that are continuon ously differentiable [0,1]. Again, using the methodsof U(t,k) 2 Tangand MacNeill (1993), it can be shownthat 1/ ) }1/2
(k)/7>2(o {Ku

and where Fl(k) = l<oo cum{u(i),u(i + k),u(i + v), u(i + k + v)}. Moreover,underAssumptions(13) and (15) andprovidedthatthe spectraldensityof the noise process is squareintegrable, can be shownthat the p vector it (?2 (t, k), )2 (t2, k),..., 2(tp, k)) has a nontrivialasymptotic probability distribution is normalwith zero mean that and covariance matrixIIK,(k,k) min(ti, in Note thatthe cumulant F1(k) canbe tj)Il. evaluated straighta certainerrorprocess.For instance,conforwardly, given siderthe class of lineartime series definedas follows:

with probability1, we can assertthatthe large-sample distributiontheoryfor {((t, k), t E [0,1]}, is the same as that for {((t, k),t E [0,1]}, where0(t, k) = O(t,k) - E{O(t,k)}. Althoughit is not crucialto the resultsto be derived,it can be shownthat cov{I VO(s, k), D(t, k)} F2(k)F(s, t), (19)

E{D(t, k)} -+ {2if(0)} and

cov{D(s, k),D(t, k)}
-

g(x, x) dx

Furthermore, the covariance kernel K(s, tlk) = cov{Bk (s), Bk (t) } of the limit processis given by K(s, tlk) = min(s, t) - stM(k), (22)

{2f (0))}2r(s, t),

where
F(s, t) = 4
sg(x,

where
2K,(k, 0) 7(k) KM(k,k) 7(0) K,(0, 0) 72(k) K(k, k) 72(0)

x) dx 2 g2(x, y) dx dy (18)

(23) Tests for residualserial correlationcan be obtainedby functionalson {U(t, k), t E [0,1]}. We definingappropriate will considertest statisticsof the following types:

240

Journal of Business & Economic Statistics, April 1999

1. Cram&r-von Mises:

n2 Zt=k+l e(t)e(t k) TT(k) = j* ( k) e(n t=1 e2(t) j=k+l

n

j y(k) 0 n (0)
(24)

2.6 Large-SampleDistributions the Test Statistics of From(21), we see that

Z =k+l

e(t)e(t - k)

j y(k)

Et{=1

e2(t)

ny(0)

)i

2. Kolmogorov-Smirnov:
T*(k)=
k+1<j<n

r n

=k+l

e(t)e(t

7 2(0) K(k, k)
-n

1/

j y(k)
(0))

t=l e2(t)

Asymptoticdistribution theoryfor the statistic(6) can also be derived.By corollary3 of MacNeill (1978), the sum of the sequenceof partialsumsin (24) convergesto a Cramerto (25) von Mises integral; wit,
n2T -2)

3. Smirnov: T(k)
=

distribution Therefore,large-sample theoryfor the statistic will be availableif the distributiontheory for the T1(k) (26) stochastic integral in (29) is tractable.Computingquantiles for the integralin (29) can pose analyticdifficulties. 4. Range: Anderson and Darling (1952) developed a methodology for computingquantilesfor the Cram&r-von Mises type stochasticintegralsof the form fl I(t)B2(t) dt, where of e(t)e(t k) j (k) T (k) = supne St=k+l weightfunction,andwhere e2(t) n y(0) T,(t),t e [0,1], is a nonnegative k+l<?j<n t=l a Brownianbridge.In the Apthe underlyingprocess is pendix, we indicatehow this methodologycan be adapted f =k+1e(t)e(t- k) j '(k) i n ee2(t) of to computethe distribution fl B (t) dt. Selected quaninf n 7(0) (0) k+l<j<n Et=l are in tiles for this distribution presented Table1 for values of M, (k) in the range [-1, 1]. (27) UnderHo:y(k) = 0 (k $ 0), the statistics(25)-(27) are, to because we are interestedin testing the respectively, In particular, equivalent reduce to the test statistic null hypothesis (3), (24)-(27) T (k)-T4(k) definedby, respectively,(6)-(9)-that is, unKu(k k) } /2sup n1T2(k) Bk(t)l, (30) der Ho:-y(k)= 0 for any specific k $ 0. "T 2(0) o<t<l
k+l<j<n

f n Zt=k+l e(t)e(t
Zt=l e2(t)

(k)-

K,(k,k)

B(t) dt.

(29)

k)

j y(k)

n y(0)

Table1. Selected Quantilesfor (a) = P[fo Bk(t) dt < a] forMu(k)= - 1.0(.1)1.0 Probabilities Mu(k)
-1.0 -.9 -.8 -.7 -.6 -.5 -.4 -.3 -.2 -.1 .0 .1 .2 .3 .4 .5 .6 .7 .8 .9 1.0

.01
.0375 .0372 .0370 .0367 .0364 .0361 .0358 .0355 .0352 .0348 .0345 .0340 .0336 .0331 .0325 .0319 .0312 .0303 .0292 .0277 .0248

.025
.0494 .0490 .0486 .0481 .0477 .0472 .0467 .0462 .0456 .0450 .0444 .0437 .0430 .0422 .0414 .0404 .0393 .0380 .0364 .0342 .0304

.05
.0644 .0637 .0630 .0623 .0616 .0608 .0600 .0592 .0583 .0574 .0565 .0554 .0543 .0531 .0518 .0504 .0488 .0469 .0446 .0416 .0366

.1
.0907 .0894 .0882 .0869 .0856 .0842 .0828 .0813 .0798 .0782 .0765 .0748 .0729 .0709 .0688 .0664 .0638 .0609 .0573 .0528 .0460

.5
.4399 .4250 .4101 .3952 3803 .3714 .3505 .3355 .3206 .3055 .2905 .2753 .2600 .2445 .2288 .2127 .1962 .1790 .1609 .1411 .1189

.9
2.0913 2.0015 1.9117 1.8220 1.7323 1.6426 1.5530 1.4636 1.3742 1.2849 1.1958 1.1069 1.0182 .9299 .8421 .7549 .6686 .5837 .5008 .4211 .3473

.95
2.9272 2.7997 2.6722 2.5447 2.4174 2.2901 2.1629 2.0358 1.9089 1.7822 1.6557 1.5295 1.4036 1.2783 1.1537 1.0300 .9078 .7878 .6715 .5611 .4614

.975
3.7972 3.6304 3.4638 3.2971 3.1306 2.9641 2.7978 2.6317 2.4647 2.3000 2.1347 1.9696 1.8051 1.6412 1.4784 1.3168 1.1573 1.0010 .8498 .7074 .5806

.99
4.9832 4.7628 4.5427 4.3226 4.1026 3.8828 3.6632 3.4438 3.2246 3.0058 2.7875 2.5695 2.3523 2.1356 1.9208 1.7078 1.4977 1.2919 1.0932 .9073 .7435

De Gooijer and MacNeill: Lagged Regression Residuals and Serial-Correlation Tests

241

n-'T3(k) and

K(k k2(0) 1/2 supBk(t) ")2(0) O<t<l

(31)

where Q?(.) the normaldistribution is functionand A(.) is and as tabulated Grenander Rosenblatt(1984, chap. 6). by of A partialtabulation E(.) was given by MacNeill(1971). if M, (k) = 1 in (22),the limitingdistributions Furthermore, of (31) and (32) are given by
[ n-1lT3(k)
2(0)}1/2

n-lT4(k) { K(kk) }1/2(0)

x( sup Bk(t)o<t<l
o<t<l

{K,(k, k)/

inf Bk(t)).

(32) = 1- 2
j=1

In general, one will need to obtain the large-sampledistributionfor these statisticsby simulationover a range of lows from MacNeill (1971) that the limiting distributions for the test statistics(30)-(32) are given by
[ n-lT2(k) ]a A ) values of M,(k). For the case M,(k) = 0, however, it fol-

(-1)jexp{-2j2a2}

(33)

and
[ n-1T4(k) {K(k,k)2()}1/2 < I

a = 1 -exp{-2}

22

(34)

(34)

SK,{u(k,k)/,2(0)}1/2

3= -

(-1)j[

(a(2J + 1)) 4(a(2j 1))],

Sand
P[

(e.g., see Doob 1949). for Becausedistribution theoryis not available the statistics (30)-(32) in general,simulationsare used to establish the empiricaldistribution under the null hypothesis.For each samplesize n andlag k, the nullvaluesfor these statistics wereeachcomputed 10,000times.The samplesizes and consideredwere, respectively,n = 30,40,50,60,80, lags then computedand are presentedin Tables2-4.
and 100 and k = 1,..., 4. The empirical quantiles were

n-AT3(k)

a
<

1a)

4D(-a),

[{K,(k,k)/y2(0)}1/2

_n-1lT4(k) .

< a
=

2.7 Adjustments Accountfor the Effectof Serial to Correlation

(

"[{K,((k,k)/Y-2(0)}1/2

1- E(-1)j
i=1

8j[1

4(ja)],

Expression(29) indicatesthat the large-sampleeffects of serial correlationand lag on the distributionof the statistic T,(k) can be adjusted for by multiplying the quantiles by the factor K,(k, k)/y2(0) = 27rf7r(1 +

Table2. Selected Quantilesforthe TestStatisticT2(k)/nforLags k = 1,..., 4 and forSample Sizes n = 30, 40, 50, 60, 80, and 100

n
30

k
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

.01
.0624 .0611 .0612 .0570 .0594 .0564 .0580 .0558 .0567 .0556 .0554 .0532 .0517 .0528 .0517 .0491 .0470 .0471 .0449 .0433 .0426 .0429 .0438 .0391

.025
.0734 .0705 .0717 .0679 .0674 .0660 .0673 .0650 .0635 .0621 .0617 .0606 .0593 .0591 .0575 .0557 .0531 .0523 .0520 .0493 .0476 .0477 .0488 .0450

.05
.0840 .0816 .0821 .0787 .0750 .0749 .0763 .0729 .0727 .0703 .0691 .0680 .0669 .0665 .0643 .0625 .0596 .0589 .0587 .0564 .0527 .0537 .0532 .0505

.1
.0980 .0950 .0951 .0922 .0896 .0868 .0870 .0847 .0832 .0815 .0800 .0777 .0758 .0761 .0751 .0725 .0678 .0675 .0669 .0650 .0596 .0609 .0621 .0594

.9
.3150 .3142 .3082 .3039 .2758 .2786 .2844 .2768 .2495 .2545 .2592 .2526 .2311 .2321 .2412 .2317 .2064 .2056 .2105 .2033 .1875 .1867 .1904 .1852

.95
.3584 .3564 .3589 .3517 .3172 .3198 .3242 .3188 .2900 .2889 .2958 .2905 .2681 .2668 .2742 .2678 .2387 .2364 .2426 .2346 .2181 .2154 .2190 .2116

.975
.3996 .4047 .3988 .3904 .3542 .3612 .3577 .3462 .3276 .3268 .3299 .3176 .3046 .2975 .3077 .2964 .2708 .2625 .2686 .2635 .2479 .2376 .2416 .2394

.99
.4564 .4448 .4596 .4378 .4055 .4043 .4141 .3745 .3692 .3621 .3814 .3476 .3446 .3338 .3450 .3307 .3095 .2932 .2942 .2945 .2767 .2658 .2669 .2645

40

50

60

80

100

242

Journal of Business & Economic Statistics, April 1999

Table3. Selected Quantilesforthe TestStatisticT3(k)/nforLags k = 1,.,.., 4 and forSample Sizes n = 30, 40, 50, 60, 80, and 100

n
30

k
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1

.01
-.0729 -.0655 -.0671 -.0743 -.0531 -.0457 -.0464 -.0544 -.0380 -.0362 -.0330 -.0388 -.0291 -.0310 -.0267 -.0315 -.0184 -.0217 -.0178 -.0234 -.0138

.025
-.0417 -.0432 -.0409 -.0464 -.0280 -.0294 -.0268 -.0297 -.0199 -.0218 -.0200 -.0221 -.0151 -.0165 -.0155 -.0161 -.0086 -.0111 -.0094 -.0109 -.0062

.05
-.0232 -.0228 -.0223 -.0269 -.0131 -.0151 -.0122 -.0150 -.0090 -.0101 -.0087 -.0094 -.0058 -.0055 -.0060 -.0070 -.0025 -.0027 -.0026 -.0038 -.0011

.1
-.0046 -.0037 -.0040 -.0073 -.0000 -.0006 -.0007 -.0027 .0010 .0009 .0006 .0002 .0017 .0025 .0015 .0016 .0033 .0029 .0036 .0028 .0039

.9
.2285 .2283 .2375 .2299 .2040 .2053 .2174 .2080 .1848 .18970 .19793 .19478 .1709 .1771 .1861 .1802 .1515 .1568 .1686 .1589 .1406

.95
.2764 .2795 .2869 .2779 .2454 .2544 .2632 .2545 .2255 .2314 .2430 .2348 .2108 .2174 .2277 .2193 .1923 .1931 .2019 .1933 .1740

.975
.3219 .3226 .3312 .3196 .2853 .2928 .3075 .2962 .2654 .2701 .2872 .2716 .2500 .2513 .2601 .2496 .2264 .2224 .2395 .2225 .2110

.99
.3702 .3805 .3926 .3702 .3344 .3490 .3482 .3395 .3220 .3173 .3262 .3149 .2988 .2884 .3031 .2896 .2705 .2539 .2684 .2566 .2599

40

50

60

80

100

2
3 4

-.0154
-.0138 -.0167

-.0081
-.0062 -.0082

-.0011
-.0009 -.0021

.0033
.0039 .0035

.1420
.1522 .1452

.1764
.1856 .1744

.2027
.2188 .2006

.2282
.2497 .2338

omitted from K,(k, k) because it converges to 0. Now, in the case of white-noise errors,this factor is equal to can distribution be unity for all lags k, and the tabulated used directly.If u(t) follows an AR(1) process-that is, u(t) = alu(t - 1) + e(t), where e(t) are iid random vari-

Note that the term Fl(k) has been ables such that E{e(t)} = 0,E{e2(t)} = 1, and r4 = 0e2iAk)f2(A) dA/'y2(0).

then the large-sampleadjustmentin the case k = 1 is K,(1, 1)/72(0) = (a4-4a2 1)/(a2 -1). This factorranges from 1.05 for jai) = .1 to 18.86 for jail = .9. Hence, the if can adjustment be quite substantial the parameter apal region.This also approachesthe edge of the stationarity
4 and forSample Sizes n = 30, 40, 50, 60, 80, and 100

Table4. Selected Quantilesforthe TestStatisticsT4(k)/nforLags k = 1...,

n
30

k
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4

.01
.0922 .0933 .0918 .0873 .0884 .0885 .0889 .0859 .0840 .0860 .0850 .0821 .0809 .0792 .0815 .0771 .0745 .0740 .0723 .0692 .0673 .0676 .0681 .0620

.025
.1062 .1055 .1036 .1002 .0989 .0993 .0998 .0971 .0953 .0939 .0949 .0908 .0880 .0897 .0894 .0861 .0817 .0811 .0800 .0760 .0739 .0739 .0749 .0694

.05
.1194 .1165 .1165 .1113 .1096 .1075 .1107 .1067 .1047 .1024 .1031 .1011 .0979 .0972 .0980 .0950 .0890 .0884 .0885 .0842 .0803 .0814 .0814 .0778

.1
.1363 .1325 .1313 .1288 .1248 .1223 .1234 .1213 .1163 .1157 .1156 .1127 .1090 .1097 .1079 .1044 .0979 .0975 .0982 .0938 .0888 .0902 .0903 .0868

.9
.3379 .3289 .3269 .3194 .3005 .2941 .3028 .2913 .2741 .2697 .2772 .2718 .2523 .2507 .2586 .2526 .2269 .2238 .2304 .2216 .2073 .2039 .2088 .2019

.95
.3788 .3747 .3726 .3619 .3333 .3324 .3417 .3274 .3059 .3040 .3129 .3048 .2878 .2823 .2923 .2830 .2559 .2488 .2612 .2495 .2338 .2274 .2374 .2273

.975
.4220 .4154 .4176 .4022 .3651 .3744 .3754 .3613 .3393 .3384 .3425 .3359 .3182 .3103 .3200 .3068 .2851 .2749 .2875 .2754 .2614 .2512 .2596 .2496

.99
.4646 .4605 .4614 .4477 .4177 .4146 .4161 .3985 .3838 .3758 .3930 .3651 .3555 .3420 .3636 .3449 .3191 .3071 .3163 .3080 .2900 .2773 .2834 .2785

40

50

60

80

100

De Gooijerand MacNeill: Tests Lagged Regression Residualsand Serial-Correlation

243

plies to other types of errorprocessesand differentvalues of k. Clearly,if one ignoresthese effects anduses the quantiles reportedin Table 1, one will have altered,perhapsin of a very significantway, the probability makinga Type I Of error. course,in practice,one needsto estimatef(A) and y(O) to make the adjustmentoperational.A consistent estimateof y(0) is given by the residualvariance.An estimateof the spectraldensity functioncan be obtainedby of smoothingthe periodogram the residualsor by fitting scheme to the residuals.Graphical a finite-parameter representationsof K,(k, k)/72(0) (k = 1,...,4) for AR(1), MA(1), and ARMA(1, 1) residualprocesseshavingGaussian white-noiseerrorswere given by De GooijerandMacNeill (1994). Note that, in derivingthe statistic(6), we ignoredterms that become small when n increases.To gain some insight to into the circumstances which the asymptoticresultsapin finite-samplesituations,De Gooijer and MacNeill ply (1994) reportedresults of a small-scalesimulationstudy. polynomialregresThey hypothesizeda simple first-order sion model y(t) = -o + 01(t/n) + u(t), with u(t) following the AR(1) processdefinedpreviously. Using 1,000 replicaof of and tions variousparameters quantiles the distribution with k = 1 were estimatedfor series the statisticTx(k)/nr2 of lengthsn = 100,200,400,600, and 800 and for selected valuesof the AR(1) parameter In broadtermsthe study a,. suggestedthe following: 1. As expected, the larger the sample size, the better esof the conformance estimatedquantilesand parameter timatesto the asymptotictheoreticalquantilesand parameters. for factortends to be underestimated 2. The adjustment = 100) and for data whose spectraldensmall samples (n The components. oppoby sity is dominated low-frequency and site is the case in which high frequenciespredominate estimatescan n > 400. This may be becauseAR parameter have largebiases for small samples. the the 3. If la,l approaches stationarity boundary, disesand betweenthe estimated quantiles parameter crepancy theoretical timatesandthe asymptotic quantilesandparameters increases. 4. The effect of samplesize on the accuracyof the obin becomes more apparent served frequencydistributions the tails, with .90 quantilesbeing betterestimatedthanthe .99 quantiles.

statistics(6H9) in comparisonwith two commonlyused tests for first-order serial correlationin OLS residualsthe Durbin-Watsonstatistic given by DW1 = namely, e2(t) and the modified E' =2{e(t) - e(t - 1)}2/Z=l Durbin-Watson statisticMDW = DW1+ (e2(1)+ e2(n))/ resultson Z-t=e2(t) proposedby King (1981). Simulation the behavior Wald's,likelihoodratio,andRao'stests (i.e., of the Lagrange test) for testing a linearregression multiplier and model with AR(1) errorswere presentedby Sutradhar Bartlett(1993). We are concerned with testing the null hypothesis Ho:7(1)/7(O) = 0 against the two-sided alternative Ha:7(1)/-(O) # 0. Under these hypotheses,all the statistics discussed here can be written so as not to involve 11,, I..., p, and hence thereis no need to considerspef0, while carrying cific values for these unknownparameters For and out the simulations computations. the designmatrix X, we selectedthe unit vector (1,..., 1). The samplesizes consideredwere n = 60, 100, and 200. Using 10,000replications we empiricallycalculatedthe cut points for each test statisticandeach samplesize havingthe commonlevel of significancea = .05 under the null hypothesis.Next from 10,000 replicationswe determinedthe size-adjusted powerfor the tests, the size being commonfor all five test statistics. Table5 reportsselectedpowersfor an AR(1) errorprocess u(t) = axu(t - 1) + e(t) and for an MA(1) errorprocess u(t) = blE(t - 1) + e(t), where for both processes e(t) r NID(0, 1). The powersof all tests increaseas n inincreases.It is also creases and as the AR/MA parameter clear from the table thatthe size-adjusted DW1 and MDW tests are uniformlymore powerful,as expected,than the T (1),T2(1), and T4(1) tests for any n large or small and in value. In particular the MA(1) case, it is any parameter to note that the DW1 test is consistentlymore interesting powerfulthanthese tests. This concurswith an observation of King (1983), who, in the contextof developinga locally for optimalprocedure testing for MA(1) errorsin the linthat ear regressionmodel, showed(through simulation) the to had good poweras compared thatof variousother DW1 tests. Note, however,that the T3(1) and DW1 tests always for have very similar powers. In particular, n = 60 and = b, = .1, the T3(1) test is slightlymore powerfulthan a, to the DW1 test. Hence,the T3(1) test appears be an interto esting alternative the DW1test for testingvariousforms of serialcorrelation. The specific conclusions suggested by this simulation In Table6 powerresultsof a second simulationexperifor = 100 and200. In this case we gentheory can be ap- mentarereported n study are as follows. The large-sample erated10,000times the regressionmodel y(t) = /o + u(t), to pliedwith confidence tests of size 5%or largerif n 2 200 and (a1l < .7. By this we mean that the simulatedquantile wherethe errorprocessis given by and the quantileobtainedby multiplyingthe white-noise t if t=1,...,n/2 au(t-1) + (t) ;= quantilewith the estimateof K, (1, 1)/7y2(0)do not differ if t = (n/2 + 1),..., n, c(t) -axu(t - 1) + by more than roughly 10%.If n _ 800, the large-sample theorycan be appliedto tests of size 5%or largerprovided with c(t) - NID(0,1). Hence, there is a changein serial(a1 < .9. in structure the errorprocess.Note fromTable6 correlation thatin generalthe powersof the T1(1)-T4(1) tests dominate COMPARISONOF POWERS 3. AN EMPIRICAL the the power of the DW1 and MDW tests. In particular, of We now examine finite-sample performance the test latter two tests performrelativelypoorly when the value

244

Journal of Business & Economic Statistics, April 1999

= Table 5. Selected Powers for Testing Ho:7y(l)/'y(O) 0 Against Ha: 7y(l)/'y(O) 0 at the 5% Significance Level When the $ Followan AR(1)or an MA(1)Error RegressionDisturbances Process; 10,000 Replications AR parameter at Test .1
.100 .101 .065 .072 .104 .068

MAparameter bl .6 .8
n= 60

.2

.4

.1

.2

.4

.6
.955 .955 .776 .865 .949 .835

.8

DW1 MDW T1(1) T2(1) T3(1) T4(1)

.300 .302 .145 .166 .299 .161

.846 .847 .602 .702 .840 .683

.991 .991 .946 .977 .991 .974

1.000 1.000 .989 1.000 1.000 1.000

.097 .098 .065 .070 .101 .068

.279 .274 .128 .147 .274 .142

.762 .764 .471 .564 .756 .529

.985 .986 .885 .946 .984 .926

n = 100
DW1 MDW T1(1) T2(1) T3(1) T4(1) .128 .123 .076 .079 .122 .080 .456 .448 .226 .266 .425 .257 .971 .969 .858 .911 .963 .902 1.000 1.000 .999 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 n = 200 DW1 MDW T7(1) T2(1) T3(1) T4(1) .233 .241 .119 .136 .226 .135 .757 .767 .536 .603 .734 .583 1.000 1.000 .997 1.000 1.000 .999 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 .226 .234 .119 .132 .218 .132 .730 .740 .499 .565 .702 .538 1.000 1.000 .983 .994 1.000 .993 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 .123 .119 .074 .079 .118 .079 .432 .416 .202 .293 .391 .226 .938 .932 .758 .831 .917 .804 1.000 .999 .966 .989 .998 .984 1.000 1.000 .993 1.000 1.000 .999

concernstesting for first-order serial correlation linear in serialcorreregression. Example2 deals with higher-order lation. Example1. Considerthe set of 62 annualsugarprices (1875-1936) listed by DurbinandWatson(DW) (1951, table 3). These datawere used to exemplifythe performance of the DW1 statistic. Polynomialregressionsof degrees p = 3 and p = 4 were fitted to the data using orthogonal polynomialstabulatedby Fisher and Yates (1948) as variables. resultswere disDetailednumerical independent 4. EXAMPLES playedby DW (1951) for p = 3. Using the same data,we Two exampleswill be consideredin this section to il- obtainfromOLS with standard errorsin parenregression, lustratethe usefulnessof our test with empiricaldata.The theses, first one, being of historicalratherthaneconomicinterest,
P(t) =
= Table6. Selected Powersfor TestingHo:-y(l)/y(O) 0 AgainstHa: = = alV t < n/2 and 7y(1)/7(0) -alV t>n/2 at the 5% "7(1)/y(O) SignificanceLevel;10,000 Replications AR parametera Test .1
.050 .049 .044 .043 .044 .047

of al increases.The powers of the T1(1)-T3(1) tests are aboutthe same. A clear exceptionis the T4(1) test, which well when al > .4. Overall, appearsto work exceptionally the results in Tables 5 and 6 strongly suggest that using Ti(k),i = 1,... ,4, as test statisticsfor serial correlations means giving up a small amountof power for cases when thereis stationarity obtaininga largeincreasein power but when stationarity not present. is

21.548

.255?1(t) +

.05762(t)

(1.403)
-

(.039)

(.010)

7.761 x 10-3 3(t) - 7.332 x 10-5 4(t), (.946 x 10-3) (3.432 x 10-5)

.2 n = 100

.4

.6

.8
.447 .442 .853 .956 .858 .998

(35)
whereR2 = .725, DW1 = .968, and ?t(t) is an orthogonal polynomialof degree1 (1= 1,..., 4). In Figure1 we presentplots of the valuesof the sequence of partialsumsof cross-products k) againstj (j = k + R(j, 1, k+2,..., n; k = 1, 3, and5). We see thatR(j, 1) increases rapidlyfor j nearn. This suggestsstronglythe presenceof first-order serialcorrelation the residuals in close to the end of the series.The firstfourrowsof Table7 containvaluesof the test statisticsTi(k)/n2, T2(k)/n, T3(k)/n, andT4(k)/n, Referenceto the quantilesof the statisticTI(k)/n2 given in Table 1 shows thatthe value at lag 1 is significant the at criticallevel a = .05. Let us assumethat the residualprofor k = 1,..., 4 for the residuals of Equation (35).

DW1 MDW (1) "T1 T2(1) T3(1) T4(1)

.064 .063 .055 .048 .067 .072 n = 200

.129 .119 .230 .239 .360 .417

.253 .244 .553 .677 .720 .930

DW1 MDW (1) T" T2(1) T3(1) T4(1)

.055 .056 .047 .045 .056 .053

.071 .069 .090 .086 .147 .132

.139 .144 .511 .625 .743 .877

.280 .285 .935 .985 .980 1.000

.492 .497 1.000 1.000 .997 1.000

De Gooijer and MacNeill: Lagged Regression Residuals and Serial-Correlation Tests

245

Table7. Valuesof Tl(k)/n2, T2(k)/n,T3(k)/n,and T4(k)/n(k = 1, Regressions of Degree 4 ..., 4) forResiduals of Polynomial Fittedto the Series of AnnualSugar Prices (1875-1936) Lag k Series
P(t)

Test

1
3.302 .485 .485 .492 .249 .252 .252 .276

2
.106 .130 .130 .185 1.104 .286 .039 .325

3
.309 .150 .150 .230 .386 .159 .159 .228

4
.204 .124 .061 .185 .253 .114 .114 .199

as variables. firstsightthe At dummyvariables independent results look satisfactory based on the "traditional" criteria t ratios).Accordingto the sign-reversal of test (R2, DW1, Thomas and Wallis (1971), however,the residualsexhibit fourth-order serialcorrelation. obtainthe folWe significant lowing least squaresestimates: C(t) = 117.087 + 1.915t (4.386) (.107) -67.017d2(t) (4.535) 93.564d1(t) (4.541) (37)

Ti(k)/n2
T2(k)/n T3(k)/n T4(k)/n

P* (t)

T(k)/n2 T2(k)/n T3(k)/n T4(k)/n

61.624d3(t), (4.531)

cess follows an AR(1) process with NID(0, 1) distributed errors.Then, on multiplyingthe quantileswith the adjustment factorreportedin Subsection2.7, it can be seen that, for all values of the AR(1) parameter the value of the a1, test statisticT2(1)/n2 is still statisticallydifferentfrom 0. Furthermore, using the quantilesof Ti(k)/n (i = 2,3, and for n = 60 in, respectively,Tables2-4, we see that at 4) lag 1 the values of these statisticsare significantat the 5% level. Thus,thereis a strongrejectionof the nullhypothesis of no first-order serialcorrelation. A simple way to improve the fitted regressionmodels is to incorporatethe AR(1) error process in the models. we the (35) Specifically, transformed regression Equation so = P(t)-&P(t-1), with&1 - 1- DW1= .516. thatP*(t) This gives the least squaresestimates P*(t) = 10.876 - .279* (t) + .071 *(t) (1.249) (.002) (.039) -8.023 x 10-3( (t) - 1.783x 10-5*(t), (1.905 x 10-3) (6.570x 10-5)

with R2 = .978, DW1 = 1.833,andDW4= .358.The DW4 test statistic DW4 = ZE=5{e(t) -- e(t --4 4)}2 E e2(t) t=1 (t) has a value that is significantat the 5% level, thus the null hypothesisof no fourth-order serial correlationis rejected. Wallis (1972) showed estimationresults for the logarithmsof C(t) to illustratehis proposition that test procedures that accountfor fourth-order serial correlationmay be requiredin regressionsestimatedfrom quarterlydata. of FollowingWallis'stransformation the originaldata,we obtain InC(t) = 4.634 + .017t - .818d,(t) (.024) (.001) (.025)
-

.515d2(t) -

.457d3(t),

(.025)

(.025)

(38)

with R2 = .978, DW1 = 1.945, and DW4 = 1.140. Again the value of DW1 is not significantly differentfrom 2. On the otherhand,the value of DW4 is statisticallysignificant at the 5% level. The values of the test statistics Tl(k)/n2, T2(k)/n,
T3(k)/n, and T4(k)/n for k = 1,...,5 and n = 52 are

shownin Table8 for Equations (37) and (38), respectively. (36) to the quantilesfor T2(k)/n, T3(k)/n, and T4(k) Referring with R2 = .400 and DW1 = 1.77. The values of the corTable8. Valuesof Tl(k)/n2, T2(k)/n,T3(k)/n,and T4(k)/n(k = 1... respondingtest statistics Tl(k)/n2, T2(k)/n, T3(k)/n, and 5) forResidualsof Quarterly Regressions Fittedto the Series of on Alcohol" T4(k)/n are given in the bottom part of Table 7 for k = (1955-1967) U.K.Consumers'Expenditure "Other 1,..., 4. The valuesof the test statisticsTi(k)/n2, T2(k)/n, Lag k andT4(k)/n showthatthe residualsare free of serialcorrelation at almostall lags k and at the 5% significance level. Series 1 Test 2 3 4 5 On the other hand,the values of the test statisticT3(1)/n C(t) .048 1.282 .107 6.915 .095 Ti(k)/n2 is still significantat the 5% significancelevel. Of course, .072 .226 .104 .672 .101 T2(k)/n .072 .226 .008 .672 .034 some caution is needed in interpreting precedingrethe T3(k)/n .130 .212 .111 .582 .135 T4(k)/n sults because the transformation chosen may not be optiIn C(t) .035 .250 .417 3.746 .040 (k)/n2 mal. A more efficient way is to estimate the model subT1 .052 .114 .151 .394 , .089 T2(k)/n AR error term. Following this apject to the first-order .052 .114 .151 .394 .023 T3(k)/n that is, all threetest proach,the same conclusionemerged; .097 .143 .161 .354 .112 T4(k)/n that no serial correlationwas left in the residualsat lags
k = 1,...,4. dataon Example 2. The secondset consistsof quarterly statistics Tl(k)/n2, T2(k)/n, and T3(k)/n clearly indicated
C*(t) T (k)/n2 Ta(k)/n T3(k)/n T4(k)/n .809 .219 -.007 .212 .749 .192 .003 .194 .194 .150 .150 .142 .155 .109 .109 .156 .355 .174 .174 .231 .902 .270 .062 .332 .852 .235 .235 .253 .130 .099 .099 .143

in consumers'expenditure the United Kingdomon "other InC'(t)

alcohol" for the period 1955-1967 (n = 52). The data were

T (k)/n2
Ta(k)/n T3(k)/n T4(k)/n

.229
.136 .136 .162

.252
.106 .096 .202

listed by ThomasandWallis(1971, appendix3). These authors presenteda linearregressionusing a trendand three

246

Journalof Business & EconomicStatistics,April1999

are highly significantat lag 4. Hence, the null hypotheACKNOWLEDGMENT sis of no fourth-order serial correlationis rejectedin faThe financial supportfrom the TinbergenInstitute is For vor of a more complicatedresiduallag structure. the We to this serial correlation, corresponds test re- gratefullyacknowledged. are indebtedto the referees fourth-order and an associateeditorfor helpfulcomments. sults reportedby Thomas and Wallis (1971) and Wallis (1972). APPENDIX: COMPUTINGQUANTILESFOR To remove the observed fourth-ordereffect, Thomas fo B (t) dt the and Wallis (1971) transformed data so that C*(t) = Considerthe process {Bk (t),t E [0,1]}. The methodwe C(t) - .778C(t - 4) and so forth. Here .778 is an estimate use to computequantilesfor f?' B (t) dt requiresthe secoefficientfor the residautocorrelation of the fourth-order uals. Wallis(1972), on the otherhand,estimatedthe model quences of eigenfunctionsand eigenvalues {($jk(), jk}, AR equation for InC(t) subjectto the simplefourth-order errorpro- which satisfy the Fredholm cess u(t) = a4u(t - 4) + e(t). Followingthese approaches, ds = AjkOjk(t). we obtainthe least squaresestimates (A.1) jlKk(st)?jk(s)
C*(t) = 22.094 + 2.582t* - 116.491d*(t) (.286) (.107) (3.294) - 81.479d*(t) - 74.725d*(t),

ues of Ti(k)/n2,T2(k)/n, T3(k)/n, and T4(k)/n, however,

in Tables 2-4 for n = 50 and to the large-sample variousdirections,includingtesting the null hypothesisof residualserialcorrelation quantiles for Tl(k)/n2 in Table 1, the null hypothe- nonzerofirst-order againstthe alsis of no serial correlation cannot be rejected at the ternativeof a nonzerohigher-order residualserial correla5% significance level for lags k = 1,... .,3. The val- tion.

Hence,using (22), the Fredholmequationto be solvedis

(39) j{s
- M.(k)st}qjk(s)

ds

(11.167)

(11.156) +

estimationresultsfor the seriesInC(t) are as follows:

InC'(t) = 2.749 + .018t' .821d/(t)

with R2 = .832, DW1 = 2.317, and DW4 = 2.418. The

j{t

M,(k)st}jk(s)

ds = Ajkqjk(t). (A.2)

(A.2) twice yields, respectively, Differentiating -Mu (k)

(40)

(.026)

(.001)
-

(.286)
.454d/(t), (.040)

have (40). We see that the two suggestedtransformations serial The second equationin (A.3) gives the general solution effectivelyaccountedfor the fourth-and fifth-order in correlation the residualsof both models. = + A2e-it/v,-, where A1 and A2 are bjk(t) Aleit/vl'constants. Using the first boundarycondition, we have A k). Substitution of this re5. CONCLUDINGREMARKS bjk(t) = (A1 - A2)isin(t/ conditiongives sult into the secondboundary serial corA new approachto testing for higher-order 1 = M,(k) - 1 relationin linearregressionmodels has been proposed.A
class of tests based on sequences of partial sums of lagged cross-products of residuals has been introduced. The examples given in Section 4 suggested possible advantages in using these tests in conjunction with commonly used tests. In particular,examination of the sample paths of the lagged cross-products of residual processes offers the possibility of determining details of the correlation structureof a time series that might be missed by observation only of the total sum of cross-products. Such details might include the possibility of nonstationarities in the serial correlation structure. Finally, the hypothesis we tested is for a specific lag k. There is, however, nothing to prevent the user of the test from applying these methods based on partial sums for various k's in an exploratory data-analysis session. Indeed the major methodology presented here can be generalized in tan x/k = M((k) A/k One can solve this equation numerically to obtain the eigenvalues to any desired level of accuracy. Based on these eigenvalues and the corresponding eigenfunctions, the Karhiinen-Lobve expansion of the process {Bk(t),t E [0, 1]} can be obtained, and the characteristic function of B (t) dt can be shown to be the stochastic integral

- 0jk(t) Ajkijk(t), (A.3) with R2 = .950, DW1 = 2.247, and DW4 = 2.068. with boundary conditions jk (0) = 0 and Rows9-16 of Table8 showthe valuesof Ti (k)/n2, T2(k)/n, = Equation(39) and T3(k)/n, and T4(k)/n for, respectively, Ajk 'k(1) jk(s)

-.513d/(t) (.040)

jSjk(s) dS + jtOjk(s)ds

Ajk?k(t)

-Mu(k)fs

ds.

Numerical inversion of this characteristic function can provide the necessary quantiles; for example, see MacNeill (1978) and De Gooijer and MacNeill (1994) for details.

S
Tests De Gooijerand MacNeill: Lagged Regression Residualsand Serial-Correlation
[Received February 1995. Revised June 1998.]

247

Durbin-Watson An Assessment Test: King,M. L. (1981),"TheAlternative of DurbinandWatson's Choiceof TestStatistic," Journalof Econometrics, 17, 51-66.

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