On the Impact of the Tests for Serial Correlation Upon the Test of Significance for the Regression Coefficient
Journal of Econometrics, Vol. 7, 1978
University of Alberta School of Business Research Paper No. 2013-253
Posted: 28 May 2013 Last revised: 30 May 2013
Date Written: June 29, 1977
Abstract
Monte Carlo methods are used to investigate the relationship between the power of different pretests for autocorrelation, and the Type I error and power of the significance test for a resulting two-stage estimate of the slope parameter in a simple regression. Our results suggest it may be preferable to always transform without pretesting. Moreover we find little room for improvement in the Type I errors and power of two-stage estimators using existing pretests for autocorrelation, compared with the results obtained given perfect knowledge about when to transform (i.e., given a perfect pretest). Rather, researchers should seek better estimators of the transformation parameter itself.
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