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Author Question: Unit root tests A) use the standard normal distribution since they are based on the t-statistic. ... (Read 262 times)

lbcchick

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Unit root tests
 
  A) use the standard normal distribution since they are based on the t-statistic.
  B) cannot use the standard normal distribution for statistical inference. As a result the ADF statistic has its own special table of critical values.
  C) can use the standard normal distribution only when testing that the level variable is stationary, but not the difference variable.
  D) can use the standard normal distribution but only if HAC standard errors were computed.

Question 2

Heteroskedasticity typically occurs in cross-sections, while serial correlation is typically observed in time-series data. Discuss and critically evaluate this statement.
 
  What will be an ideal response?



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Kjones0604

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Answer to Question 1

Answer: B

Answer to Question 2

Answer: Serial correlation in cross-sections can occur by chance if the data is ordered using one of the regressors. While it is easy to get rid of serial correlation in this case by simply reshuffling the data, the serial correlation contains some information, such as a possible misspecification of functional form.

Serial correlation does occur typically in time-series data, but as the textbook emphasized, conditional heteroskedasticity shows up in many economic time series. The ARCH and GARCH models are often used when volatility clustering is present in financial time series, including the inflation rate. Hence this special type of heteroskedasticity is observed in time-series data.





 

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