Testing

Question 1

What is the Augmented Dickey-fuller test?

Answer 1

Used to determine is a time series contains a unit root

Question 2

Process of ADF

Answer 2

Regress the time series using OLS to create estimators
Calculate the test statistic ß = ß/SE(ß)
Compare test statistic to ADF critical values under the dickey fuller distribution
Either reject H0: unit root (non-stationary) or H1: no unit root (stationary)

Question 3

What is the Breusch-Pagen test

Answer 3

A test to determine the presences of homoscedasticity

Question 4

Breusch-Pagen procedure

Answer 4

Regress the model to find the residuals
Regress the squared residuals
Use the R^2 from the auxiliary and compute to test statistic
Test statistic: t = R^2 x n
Compare t to the critical values of the chi-squared distribution
t > critical value reject H0
t <= critical value fail to reject H0

Question 5

Breusch-Pagen Hypotheses

Answer 5

H0: Presence of Homoscedasticity
H1: Presence of Heteroscedasticity

Question 6

Distribution of ADF

Answer 6

Dickey-Fuller Distribution

Question 7

Distribution of Breusch-Pagen

Answer 7

Chi-Squared distribution

Question 8

T-test

Answer 8

Tests whether the estimator follows a t-distributed.

Question 9

Test statistic of a t-test

Answer 9

T = estimated coefficient - observed coefficient / Standard Error (SE) of the estimated coefficient

Question 10

Distribution of t-test

Answer 10

T-distribution

Question 11

Procedure of t-test

Answer 11

Generate the estimated coefficient
Calculate the test statistic
Compare t-statistic to critical values under the t-distribution
If t > t critical values: reject H0

Question 12

Hypothesis of t-test

Answer 12

H0: test statistic follows a t-distribution
H1: t <= critical value fail H0