The effect of a variance shift on the Breusch-Godfrey's LM test

Joo Yeon Hyun; Hyeong Ho Mun; Tae Hwan Kim; Jinook Jeong

doi:10.1080/13504850701748933

The effect of a variance shift on the Breusch-Godfrey's LM test

Joo Yeon Hyun, Hyeong Ho Mun, Tae Hwan Kim, Jinook Jeong

Department of Economics

Research output: Contribution to journal › Article › peer-review

4 Citations (Scopus)

Abstract

In this article, we study the impact of an abrupt change in variance on the Breusch-Godfrey's LM test for autocorrelation. It is demonstrated by Monte Carlo simulations that a break in variance can generate spurious rejections of the null hypothesis of no serial correlation. Hence, a researcher might conclude that the error terms are serially correlated when in fact the contrary is true. It has been found that the likelihood of making this mistake depends on three factors: (i) break size, (ii) break location and (iii) the number of lagged terms included in the LM test.

Original language	English
Pages (from-to)	399-404
Number of pages	6
Journal	Applied Economics Letters
Volume	17
Issue number	4
DOIs	https://doi.org/10.1080/13504850701748933
Publication status	Published - 2010 Mar

Bibliographical note

Funding Information:
The first and second authors are grateful for the financial support by the BK 21 project of School of Economics, Yonsei University.

All Science Journal Classification (ASJC) codes

Economics and Econometrics

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10.1080/13504850701748933

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abstract = "In this article, we study the impact of an abrupt change in variance on the Breusch-Godfrey's LM test for autocorrelation. It is demonstrated by Monte Carlo simulations that a break in variance can generate spurious rejections of the null hypothesis of no serial correlation. Hence, a researcher might conclude that the error terms are serially correlated when in fact the contrary is true. It has been found that the likelihood of making this mistake depends on three factors: (i) break size, (ii) break location and (iii) the number of lagged terms included in the LM test.",

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The effect of a variance shift on the Breusch-Godfrey's LM test

Abstract

Bibliographical note

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