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Cross Sectional Data Analysis-Section 2
Important terms and concepts from CSDA Fall 2012
9
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Graduate
09/29/2012

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Term
What is homoscedasticity?
Definition
It refers to the variance of the error term, conditioned on the regressors, is constant: Var(ui|x1...xk)=σ2
Term
Heteroscedasticity
Definition

If the variances do not remain constant, we encounter heteroscedasticity


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Term
What about our model is nullified by heteroscedasticity?
Definition
  • The OLS estimators are still unbiased and consistent
  • However, the standard errors are biased which makes the t- and F-statistics no longer valid
  • The coefficient estimates are no longer usable
  • OLS model is no longer BLUE
Term

Robust Standard Errors

(Huber-White standard error)

Definition
sqrt{Avar(ßj)=[∑rij2ui2/RSSj2]}
Term
How does testing for heteroscedasticity work?
Definition
test whether the squared error terms are related to one or more of the regressors
Term
What is a famous test for heteroscedasticity?
Definition
Breush-Pagan test for heteroscedasticity
Term
First line of defense for heteroscedasticity
Definition
Robust Standard Errors
Term
If we know something more specific about the heteroscedasticity, we can find more efficient estimators than OLS
Definition

Solve with Weighted Least Squares (WLS)


Var(u|x)=σ2 h(x)

where h(x) is a functional form of the regressors

 

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