Question

Steps in the Breusch-Godfrey test for autocorrelation up to two in the error term

a) Three steps
b) Four steps
c) Five steps
d) Six steps

Answer 1

The Breusch-Godfrey test for detecting autocorrelation in the residuals from a regression analysis involves four main steps when checking for a lag of up to two.

Step-by-step explanation:

The Breusch-Godfrey test is used for detecting autocorrelation in the residuals from a regression analysis. The question asks for the number of steps involved in the test when checking for autocorrelation up to a lag of two. Here's a summary of the steps:

1. Estimate the original regression model and obtain the residuals.
2. Run an auxiliary regression of the residuals on the original independent variables plus the lagged residuals up to order two.
3. Calculate the test statistic, which is the nR² from the auxiliary regression, where n is the number of observations and R² is the coefficient of determination from the auxiliary regression.
4. Compare the test statistic to the chi-square distribution with degrees of freedom equal to the number of lagged residual terms to determine if autocorrelation is present.

The answer to the question would therefore be that there are four steps in the Breusch-Godfrey test for autocorrelation up to two in the error term.