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Homoskedasticity - Var(u|x) = 2
Heteroskedastic Case
(xi x ) ui
1 = 1 +
2
(
)
x
x
i
2 2
(
)
x
x
Var (1 ) =
2
( ( xi x ) ) 2
Var(1 ) =
,
2 2
( ( xi x ) )
Var j
r u
)=
2
ij i
2
j
SSR
where
ui are are the OLS residuals
rij is the residual from regressing x j on other independent variables
SSR j is the sum of squared residuals from this regression
( )
R2 k
F=
1 R 2 (n k 1)
WLS estimator
Under MLR 1-4 and 6, the WLS estimator now satisfies
MLR 5. We can calculate standard errors and so test
statistics. The t/F statistics have exact distributions.
Furthermore, it is a BLUE (that is, more efficient than OLS)
and so one example of Generalized Least Square (GLS)
estimators.
However, we should specify the form of heteroskedasticity.
In practice, we rarely know how the variance depends on a
particular independent variable in a simple form.
Example:
Implementation:
Step1. Run the original OLS model, save the residuals,
Step2. Create ln(2)
Step3. Regress ln(2) on all of the independent variables
and get the fitted values,
Step4. Exponentiate the fitted values, that is, =exp()
Step5. Estimate the original model by WLS
using 1/ as the weight
Further Comments:
1. FGLS
2. WLS