Testing autocorrelation in a system perspective testing autocorrelation

Abstract

The Breusch-Godfrey test for autocorrelated errors is generalised to cover systems of equations, and the properties of 18 versions of the test are studied using Monte Carlo methods. We show that only one group of tests regularly has actual size close to the nominal size; namely the likelihood ratio tests of the auxiliary regression system that are corrected in some manner for degrees-of-freedom. The Rao Ftest exhibits the best performance, whilst the commonly used TR2 test behaves badly even in single equations. However, the size and power properties of all tests deteriorate sharply as the number of equations increases, the system becomes more dynamic, the exogenous variables become more autocorrelated and the sample size decreases. This performance has, in general, an unknown degree since the interaction amongst these factors does not permit a predictive summary, as might be hoped for by response surface-type approaches.