Introductory Econometrics

Assignment 2, Semester 1, 2024

Instructions:

1. The assignment must be electronically submitted by 4:30pm Australian Eastern Standard Time,
on Friday, 24th May 2024.

2. The file needs to be uploaded in PDF format by only one member of each group.

3. After Step 2, all members of the group must click the ”Submit Assignment” button on Moodle and
accept the University’s submission statement. This step is essential, so please make sure that you
do this.

4. When instructed to do so, you must report your results in equation form, with standard errors
reported in parentheses below the parameter estimates. Screen shots of EViews (or any other
statistical package) output are not acceptable. For example, the estimated regression equation
below is reported in equation form with standard errors reported in parentheses below the estimated
coefficients:
U N DER5M
d R = 75.459 − 0.004 GDP P C
(7.607) (0.001)

5. The assignment must be typed. Please use Times New Roman font size 12.

6. Please attach a number to any equation or diagram that you refer to when answering the assignment
questions.

7. Unless otherwise instructed, all hypothesis tests should be conducted at the 5% significance level.

8. If an assignment is submitted late a penalty of 10% point deduction per 24hrs late applies.

9. If you are applying for special consideration for circumstances that may make you unable to engage
in group work or to adhere to strict deadlines, please let Didier know as early as possible, so that
alternative arrangements can be made in time.

10. A penalty of up to 10% will be imposed for failure to comply with the instructions above.

1
Peer Evaluation Surveys:
Each group member will be required to complete an anonymous peer evaluation survey. The survey will
be done conducted via the FeedBack Fruits app. You will find the link to the app on the Assessment
page on Moodle. You will be asked to rate your group members’ participation and effort. The aim of the
survey is to identify and address any dysfunctional groups as early as possible. The survey will also be
used to adjust your assignment marks in the following manner:

• Consider hypothetical student called Arsene:

– Let n0 equal the number of (D) votes that Arsene receives from his teammates. A (D) indicates
that in the opinion of his teammates Arsene has contributed nothing to the completion of the
assignment.
– Let n1 equal the number of (C) votes that Arsene receives from his teammates. A (C) vote
means that in the opinion of his teammates Arsene has contributed less than it was agreed by
the group that he would contribute.
– Let GM equal Arsene’s group submission mark. If n0 + n1 ≥ 2, then Arsene’s mark for the
assignment is
max {0, 1 − 0.4n0 − 0.15n1 } × GM.

If n0 + n1 < 2, then Arsene’s mark for the assignment will be equal to the GM .

• If you fail to complete the survey by the deadline, we will assume that you have given everyone else
in your group a (B) and that you have given yourself a (D).

Failure to complete the survey by the deadline will result in a loss of marks, so please complete the survey
on time. It is important to communicate clearly with your group members and make sure that everyone
understands what is expected from them.

Data description
The purpose of this assignment is to investigate the average daily temperature in Melbourne. The file
‘data A2.csv’ contains observations on the following variables:

Variable Code Description

temperature average temperature in Celsius
date indicates the year, month, and day

Place the Eviews output used for answering the questions in an Appendix.

2
Question 1 (20 marks)
Consider the linear regression equation for temperature with a trend and monthly dummies as predictors.

1(a) Estimate the linear regression equation. Report the estimated equation in equation form with the
estimated coefficients and standard errors to three decimal places. (4 marks)

1(b) Perform the Breusch-Pagan test of the null hypothesis that the conditional variance of the error
term is homoskedastic against the alternative that the variance varies across months. Specify any
auxiliary regressions that you estimate in answering the question. State the null and alternative
hypotheses in terms of restrictions on relevant parameters, specify the form and distribution of the
test statistic under the null, the sample value and critical value of the test statistic, your decision
rule and your conclusion. (8 marks)

1(c) Perform the standard White test of the null hypothesis that the conditional variance of the error
term is homoskedastic against the alternative that it is a smooth function of the regressors. Specify
any auxiliary regressions that you estimate in answering the question. State the null and alternative
hypotheses in terms of restrictions on relevant parameters, specify the form and distribution of the
test statistic under the null, the sample value and critical value of the test statistic, your decision
rule and your conclusion. (8 marks)

Question 2 (20 marks)

Consider the linear regression equation for temperature with a trend and monthly dummies as predictors.

2(a) Perform a Breusch-Godfrey test of the null hypothesis that there is no third-order autocorrelation
in the error term in. Specify any auxiliary regressions that you estimate in answering the question.
State the null and alternative hypotheses in terms of restrictions on relevant parameters, specify
the form and distribution of the test statistic under the null, the sample value and critical value of
the test statistic, your decision rule and your conclusion. (8 marks)

2(b) Estimate an AR(3) model for temperature with a trend and monthly dummies included as regres-
sors. Compare the correlogram of the residuals in this model to the correlogram of the residuals in
the model estimated in Question 1a. Briefly discuss your findings. (4 marks)

2(c) Correct the standard errors for the model estimated in Question 1a based on the results from the
tests in Question 1c and 2a. Compare the results obtained with the usual OLS standard errors to
the results with the corrected standard errors. (4 marks)

2(d) Use the model estimated in Question 1a with the correct standard errors to comment on the
seasonal pattern in average daily temperatures in Melbourne, and whether the results suggest
global warming. (4 marks)