In estimating a regression based on monthly observations from January 1987 to December 2002 inclusive, you find that the coefficient on the independent variable is positive and significant at the 0.05 level. You are concerned, however, that the t-statistic on the independent variable may be inflated because of serial correlation between the error terms. Therefore, you examine the Durbin-Watson statistic, which is 1.8953 for this regression.
A. Based on the value of the Durbin-Watson statistic, what can you say about the serial correlation between the regression residuals? Are they positively correlated, negatively correlated, or not correlated at all?
B. Compute the sample correlation between the regression residuals from one period and those from the previous period.
C. Perform a statistical test to determine if serial correlation is present. Assume that the critical values for 192 observations when there is a single independent variable are about 0.09 above the critical values for 100 observations.
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