Econometrica: Jan, 1983, Volume 51, Issue 1

Testing Residuals from Least Squares Regression for Being Generated by the Gaussian Random Walk

https://doi.org/0012-9682(198301)51:1<153:TRFLSR>2.0.CO;2-Q
p. 153-174

Alok Bhargava, J. D. Sargan

This paper considers the null hypothesis that the errors on a regression equation form a random walk. By using the standard Durbin-Watson assumptions, we derive three test statistics that are uniformly most powerful against the alternative hypothesis that the errors are being generated by the stationary first order Markoff process. Unfortunately, the tabulated lower and upper bounds are too wide apart and so we compare the powers of the three tests using simulated as well as economic data. It is then recommended that the Imhof routine should be attached to standard regression programs to calculate the exact limit of the Berenblut-Webb statistic.