To see comments, place the mouse's white cross near a red triangle. Start in cell A2.

How can we see Serial Correlation from an Error Plot?

A=

0.00

Durbin
Watson

Autocorrelation=
i.i.d.
tim
random
variables e

-0.3002
-1.2777
0.2443
1.2765
1.1984
1.7331
-2.1836
-0.2342
1.0950
-1.0867
-0.6902
-1.6904
-1.8469
-0.9776
-0.7735
-2.1179
-0.5679
-0.4040
0.1349
-0.3655
-0.3270
-0.3702
1.3426
-0.0853
-0.1862
-0.5132
1.9722
0.8657
2.3757
-0.6549
1.6615
-1.6124
0.5389
0.9022
1.9189
-0.0845
-0.5238
0.6751
-0.3813
0.7576

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40

et
-0.3002
-1.2777
0.2443
1.2765
1.1984
1.7331
-2.1836
-0.2342
1.0950
-1.0867
-0.6902
-1.6904
-1.8469
-0.9776
-0.7735
-2.1179
-0.5679
-0.4040
0.1349
-0.3655
-0.3270
-0.3702
1.3426
-0.0853
-0.1862
-0.5132
1.9722
0.8657
2.3757
-0.6549
1.6615
-1.6124
0.5389
0.9022
1.9189
-0.0845
-0.5238
0.6751
-0.3813
0.7576

et

0.0901
1.6325
0.0597
1.6294
1.4360
3.0038
4.7681
0.0548
1.1991
1.1809
0.4764
2.8576
3.4111
0.9558
0.5983
4.4856
0.3225
0.1633
0.0182
0.1336
0.1069
0.1371
1.8027
0.0073
0.0347
0.2634
3.8896
0.7494
5.6437
0.4289
2.7604
2.5998
0.2905
0.8139
3.6822
0.0071
0.2744
0.4558
0.1454
0.5740

1.81
0.08
(et-et-1)2

3.0000

2.0000

1.0000

0.0000
12345678911111111112222222222333333333344444444445
01234567890123456789012345678901234567890
-1.0000

0.9554
2.3163
-2.0000
1.0655
0.0061
sc'ed errors over time
-3.0000
0.2860
15.3407
3.8002
1.7668
4.7599
0.1572
1.0005
worksheet).
0.0245
0.7557
0.0417
1.8075
2.4025
0.0269
0.2904
0.2503
0.0015 lower
upper
0.0019
2.9340
2.0390
0.0102
0.1070 Answer
6.1773
1.2244
2.2800
9.1843
5.3655
10.7181
4.6283
0.1319
1.0337
4.0137
upper
0.1930
1.4374
lower
1.1161
1.2972
lower
upper

0
-3

-2

-1

-1

-2

error vs.-3lagged error

How do we test for Serial Correlation?

To test for serial correlation we must calculate a

Durbin Watson Statistic (see Calculating dw
This is being done in columns D & E.
Once dw is calculated, we must interpret it.
The test depends on whether dw > 2 or dw<2
SUPPOSE dw<2.
Use pp. A70-2 to find upper and lower d values.
With n=50 and k=1 we have:
d
= 1.42 and d
= 1.50 (p. A71)
Q: Why use a significance level of .025?

We wish to test the null hypothesis that there is n

serial correlation, against the alternative hypothe
of positive serial correlation (since dw<2, see top
middle paragraph on p. 180).
If dw>d , accept the null hypothesis.
If dw<d , accept the alternative hypothesis.
If d <dw<d , the test is inconclusive.

If dw>dupper, accept the null hypothesis.

If dw<dlower, accept the alternative hypothesis.
If dlower<dw<dupper, the test is inconclusive.
-1.4442
-0.8472
-1.5216
-0.3629
-0.0325
0.0281
-0.3227
2.1945
-1.7425
-0.7365

41
42
43
44
45
46
47
48
49
50

-1.4442
-0.8472
-1.5216
-0.3629
-0.0325
0.0281
-0.3227
2.1945
-1.7425
-0.7365

2.0857
0.7178
2.3152
0.1317
0.0011
0.0008
0.1041
4.8158
3.0362
0.5424
66.8947

4.8479
0.3563
0.4547
1.3426
0.1092
0.0037 Answer
0.1231
6.3364
15.4998
1.0120
121.0343

With A=0, we see dw=1.81.

Q: What can we conclude here?

With A=.5, dw=.73.

Q: What can we conclude here?

A=.15 yields dw=1.46.

Q: What can we conclude here?

Answer

Answer

Suppose instead that dw>2.

In this event, the bounds need to be transformed. To do this, subtract the boun
from 4. Here we test for negative serial correlation. In particular:
we wish to test the null hypothesis that there is no serial correlation, against the
alternative hypothesis of negative serial correlation (since dw>2) (see bottom of
middle paragraph on p. 180).
If dw<4-dupper, accept the null hypothesis: no serial correlation.
If dw>4-dlower, accept the alternative hypothesis: negative serial correlation.
If 4-dlower > dw > 4-dupper, the test is inconclusive.
If A=-.5, dw=3.05.
Q: What can we conclude?
Answer

If A=-.3, dw=2.56.
Q: What can we conclude?
Answer

If A=-.15, dw=2.18.
Q: What can we conclude?
Answer

The Durbin-Watson statistic, dw, is bounded by 0 and 4. The test is symmetric

about 2 (as described above). Thus we can think of the test as being organized
along the number line in the following way based on where dw falls:
0
positive
serial
correlation

dlower

dupper

indeterminate

2
no serial correlation

4-dupper 4-dlower
indeterminate

4
negative
serial
correlation

an Error Plot?
3

0
-3

-2

-1

-1

-2

error vs.-3lagged error

erial Correlation?

n we must calculate a

ee Calculating dw

one in columns D & E.

must interpret it.
hether dw > 2 or dw<2

er and lower d values.

ve:
50 (p. A71)
level of .025?

pothesis that there is no

he alternative hypothesis
n (since dw<2, see top of
0).
ull hypothesis.
ternative hypothesis.
t is inconclusive.

ull hypothesis.
ternative hypothesis.
t is inconclusive.

.
here?

his, subtract the bound

articular:
correlation, against the
e dw>2) (see bottom of

relation.
ive serial correlation.

The test is symmetric

est as being organized
re dw falls:
4-dlower

terminate

4
negative
serial
correlation

The Durbin-Watson test requires one to calculate the Durbin-Watson statistic, described on p. 180, equation 5.15 (reproduced
below). Unfortunately, this statistic is not part of Excel's regression output, but it can be calculated from that output. First, click
residuals when running the regression. This gives the residual terms from which dw (the text uses d) can be calculated. The
denominator is simply the Sum of Squared Residuals from the ANOVA table in Excel's regression output.

( et et 1 )2
dw=

t =2

e 2t

The residuals on the Main worksheet are not based on an actual regression, therefore the sum of squared residuals must be

t =1
calculated from the residuals themselves. The residuals are in cells C6:C55; the squared residuals are in D6:D55; and the sum
these squared residuals, the denominator of the DW fraction, is in cell C56.

The numerator of the DW statistic is the sum across time periods 2 to n of the squared differences between sucessive residual
This is calculated for each time period in cells E7:E55 and the sum is calculated in E56. The resulting Durbin-Watson statistic
calculated in cell E3 as DW = E56/D56.

An alternative method of calculation is possible, but it is not as hueristic. This calculation uses two of the functions available us
the function key, fx, on Excel's Standard Tool Bar (these are in the Math & Trig section of the paste function). This is not the
suggested way to calculate the dw statistic, but is provided for those who feel comfortable with using the special functions on th
function key. The two functions are: SUMXMY2(), the sum of squared differences between X and Y; and SUMSQ(), the sum of
squares. The Durbin-Watson statistic is calculated in cell A27 below, using these functions.

1.81 Durbin-Watson Statistic

quation 5.15 (reproduced

om that output. First, click on
can be calculated. The
put.

uared residuals must be

re in D6:D55; and the sum of

tween sucessive residuals.

g Durbin-Watson statistic is

the functions available using

nction). This is not the
the special functions on the
and SUMSQ(), the sum of

This is simply an expanded version of the

right graph on the main sheet.

A=

0.00

Autocorrelation=
iid errors
-0.3002322
-1.2776832
0.2442573
1.2764735
1.1983502
1.7331331
-2.1835876
-0.2341812
1.0950225
-1.0867006
-0.6902042
-1.6904323
-1.8469109
-0.9776295
-0.7735071
-2.1179312
-0.5679249
-0.4040476
0.1348531
-0.365493
-0.3269906
-0.3702405
1.3426416
-0.0852845
-0.1861576
-0.5132074
1.972212
0.865673
2.3756547
-0.6549067
1.6614558
-1.6123977
0.5389484
0.9021915
1.9189156
-0.0845171
-0.5237951
0.6751384
-0.3813238
0.7576114
-1.4441866
-0.8472375
-1.521571

error vs. lagged error

sc'ed error
-0.300232159
-1.277683168
0.2442573077
1.2764735402
1.1983502191
1.7331331037
-2.18358764
-0.234181243
1.095022526
-1.086700649
-0.69020416
-1.690432327
-1.846910891
-0.977629497
-0.773507054
-2.1179312171
-0.567924872
-0.404047569
0.1348530532
-0.365492951
-0.32699063
-0.370240514
1.3426415535
-0.085284455
-0.186157649
-0.513207397
1.972211976
0.8656729733
2.3756547307
-0.6549066711
1.6614558263
-1.612397682
0.5389483704
0.9021914593
1.9189155864
-0.084517069
-0.523795052
0.6751383808
-0.381323844
0.7576113603
-1.444186637
-0.847237516
-1.521570994

0.08

lagged error
-0.30023216
-1.27768317
0.24425731
1.27647354
1.19835022
1.7331331
-2.18358764
-0.23418124
1.09502253
-1.08670065
-0.69020416
-1.69043233
-1.84691089
-0.9776295
-0.77350705
-2.11793122
-0.56792487
-0.40404757
0.13485305
-0.36549295
-0.32699063
-0.37024051
1.34264155
-0.08528446
-0.18615765
-0.5132074
1.97221198
0.86567297
2.37565473
-0.65490667
1.66145583
-1.61239768
0.53894837
0.90219146
1.91891559
-0.08451707
-0.52379505
0.67513838
-0.38132384
0.75761136
-1.44418664
-0.84723752

1
0
-3

-2

-1

0
-1
-2
-3

-0.362877
-0.0324792
0.028117
-0.322716
2.1945016
-1.7424827
-0.736477

-0.362877017
-0.032479193
0.0281170287
-0.322716005
2.194501576
-1.742482709
-0.736476977

-1.52157099
-0.36287702
-0.03247919
0.02811703
-0.32271601
2.19450158
-1.74248271

rror