Testing Against General Autoregressive and Moving Average Error Models when the Regressors Include Lagged Dependent Variables

Since dynamic regression equations are often obtained from rational distributed lag models and include several lagged values of the dependent variable as regressors, high order serial correlation in the disturbances is frequently a more plausible alternative to the assumption of serial independence than the usual first order autoregressive error model. The purpose of this paper is to examine the problem of testing against general autoregressive and moving average error processes. The Lagrange multiplier approach is adopted and it is shown that the test against the nth order autoregressive error model is exactly the same as the test against the nth order moving average alternative. Some comments are made on the treatment of serial correlation.