The t-statistic under dynamic misspecification

Abstract

In this chapter, we analyse the t-statistic for a linear model with one stochastic regressor and with autocorrelated errors under dynamic misspecification. The motivation for this is as follows. The t-test for a univariate regression model with one regressor is a special case of an omitted variable test for a multivariate regression model with multiple regressors. The homogeneity test for a consumer demand system can be formulated as an omitted variable test. This will be studied in detail in the chapters 3–6. The example studied in this chapter illustrates some applications of asymptotic theory and Monte Carlo experimentation in a simple framework. It can be seen as an introduction to what follows in the other chapters.