A researcher conducts a Breusch-Godfrey test using 3 lags of the residuals in the auxiliary
regression. The original regression contained 5 regressors including a constant term and was
estimated using 105 observations. The R2 is 0.64 for the auxiliary regression and 0.77 for the
original regression.
a) Explain the reasoning to use the Breusch-Godfrey test. Briefly explain how the test is
carried out in general
b) State H0 and H1 for a Breusch-Godfrey test based on the given data.
c) Does autocorrelation exist for this case? Perform the Breusch-Godfrey test using a 5%
significance level and draw a conclusion.
