Discussion
For a linear regression model Yi = α + βXi + ρi, Durbin-Watson statistic is used to test for :
Answer: A
The Durbin-Watson statistic tests for Serial autocorrelation among residuals.
The statistic is \(d = \sum (e_{t} - e_{t-1})^{2} / \sum e_{t}^{2}\), computed from successive OLS residuals. It ranges from 0 to 4: a value near 2 indicates no first-order autocorrelation, values towards 0 positive autocorrelation, and values towards 4 negative autocorrelation.
It is not a check on arithmetic. Functional form is tested with tools such as Ramsey's RESET test, and heteroscedasticity with tests such as Breusch-Pagan, White or Goldfeld-Quandt.
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