Monthly closing stock prices for a utility company were obtained from January 2014 through August 2015. A regression model was estimated to describe the trend in closing stock prices over time.
a. Based on the plot of residuals versus predicted values, is the linear model appropriate? Explain. b. The Durbin-Watson statistic for the collected data was found to be 0.5626. What can you conclude from this statistic at the 0.01 level of significance?

Question

Monthly closing stock prices for a utility company were obtained from January 2014 through August 2015. A regression model was estimated to describe the trend in closing stock prices over time.
a. Based on the plot of residuals versus predicted values, is the linear model appropriate? Explain.  b. The Durbin-Watson statistic for the collected data was found to be 0.5626. What can you conclude from this statistic at the 0.01 level of significance?

Quizplus · Accepted Answer

The Answer is a. The residual plot shows a clear pattern and curvature. It appears that a linear model would not be appropriate.
b. At the 0.01 level of significance, dL = 0.95. Since 0.5626 is less than this value, we can conclude that there is evidence of positive autocorrelation.

Monthly Closing Stock Prices for a Utility Company Were Obtained