Lecture notes 10 Heteroscedasticity

Question 1

What is a real life example of Heteroscedasticity

Answer 1

Y = Wages
X= education

Those with university degrees will have a higher dispersion of variance compared to those who have just college

Question 2

What is heteroscedasticity

Answer 2

When the dispersion of epsilon is not constant for all x

Question 3

What are the consequences of heteroscedasticity?
What are the implications of this

Answer 3

-Unbiasedness of OLS estimators does not change

-Variance of OLS estimates changes , so test statistics needs to be modified.

Question 4

Why does heteroscadicity cause the variance to change?

Answer 4

When simplifying sum of i=1 to n of w^2 Var(ei | x) is no longer equaled to sigma squared / sum. of i =1 to n (xi - xbari).

Question 5

What is the issue of heteroscadicity and how can we improve this?

Answer 5

Statistical f-tests and t-tests are not valid

Therefore, we need to use heteroscadicity robust standard errors.

Question 6

How can you test heterescedasticity

Answer 6

White’s Heteroscedasticity test on Xs again
y = b0 b1x1 + b2x2

run regression and save residuals e

then run e^2 on the independent x’s with gammas
H0 gammas are all equal to zero
H1 gammas are not equales to zero

if coefficinets are significant reject H0 and there is heteroscedascitiy