5/18/2021 Econometrics - Heteroskedasticity Flashcards | Quizlet

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Econometrics - Heteroskedasticity
Terms in this set (9)

Heteroskedasticity Non-constant variance for all errors

Properties of B with - Unbiased

Heteroskedasticity found in the - Not efficinet
Error Terms - Underestimates the true variance (using OLS)

The basic idea behind any test is to determine

How to test for whether there appears to be a systematic
Heteroskedasticity relationship between the variances of the errors and
the explanatory variables.

Estimates the linear relationship between the

variance of the errors and the explanatory variables.

1. Estimate the model using OLS

2. Save the residuals, yielding a predicted value for
the error term
3. Square the residuals
Breush-Pagan Test 4. Run a regression of the squared residuals on all
the explanatory variables
5. Test to see if all the slope coefficients are zero
using a Chow test

If the null is rejected, then there IS an estimated

relationship between the residuals and explanatory
variables and heteroskedasticity is a problem.

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Similar to the Breush-Pagan Test but includes

squared terms for all explanatory variables as well.

1. Estimate the model using OLS

2. Save the residuals, so that you have a predicted
value for the error
3. Square the residuals
4. Run a regression of the squared residuals on all
White Test the explanatory variables and squared explanatory
variables
5. Test to see if the slope coefficients are zero using
a Chow test

If the null is rejected, then there IS an estimated

relationship between the residuals and explanatory
variables and heteroskedasticity is a problem.

A traditional white test can use up many degrees of

freedom when including all explanatory variables
and squared explanatory variable.s To circumvent
this problem, White proposed a modified test.

1. Estimate the model using OLS

2. Save the residuals, so that you have a predicted
value for the error
Modified White Test
3. Square the residuals
4. Save y-hat, the predicted values for y
5. Run a regression of the squared residuals on the
values for y and y squared

If the null is rejected, then there IS an estimated

relationship between the residuals and explanatory
variables and heteroskedasticity is a problem.

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1. Robust Standard Errors

2. Transform the model using Weighted Least
Solutions to Deal with Squares (WLS)/ Feasible Generalized Least Squares
Heteroskedasticity (FGLS) estimation

Using OLS gives unbiased estimators. However, it

will yield incorrect standard error estimates. White
suggesting estimating S robust = (X'X)^-1
X'SX(X'X)^-1, where S is the estimated variance
Robust Standard Errors
covariance matrix of the errors.

These estimates are asymptotically efficient and are

useful with large samples.

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Weighted Least Squares (WLS)

Transform the original equation by dividing both
sides by the sqt(ht). This represents the idea that
heteroskedasticity is known up to a multiplicative
constant. Estimates from this model will be unbiased
and efficient..

Feasible Generalized Least Squares (FGLS)

Estimation
We will not be able to transform this model until we
know how to estimate ht.

1. Estimate the model using OLS

2. Save the residuals, so that you have a predicted
Weighted Least Squares value for the error term
(WLS)/ Feasible Generalized 3. Create ln(e^2) by squaring the residuals and take
Least Squares (FGLS) the natural log
Estimation 4. Run the regression using ln(e^2) as the
dependent variable
5. Save the fitted value for ln(e^2), what we are
calling gt
6. Exponentiate the fitted values to recover ht =
exp(gt)
7. Transform equation by dividing both sides by
sqt(ht)
8. Estimate the transformed equation using OLS

This will be biased, but consistent and more

efficient than OLS without the transformation. For
large sample sizes, FGLS is an attractive alternative
to OLS when heteroskedasticity is present.

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