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AAEC 4302 Advanced Statistical Methods in Agricultural Research
AAEC 4302 Advanced Statistical Methods in Agricultural Research
ADVANCED
STATISTICAL METHODS IN
AGRICULTURAL RESEARCH
Chapter 15.1
Heteroscedasticity
Heteroscedasticity
Assumptions of a normal regression model:
The disturbances are independent random variables
The standard deviations of all disturbances are equal:
(u
i
) =
u
for all i
Heteroscedasticity occurs when the error term
(and thus the dependent variable Y) does not
have a constant variance across observations:
(u
i
) =
i
Heteroscedasticity
Heteroscedasticity
Heteroscedasticity
The OLS parameter estimators are still
unbiased, but OLS standard errors are
incorrect
Also, the OLS parameter estimators are no
longer the most efficient (i.e. minimum
variance), even if the error term is normally
distributed
Heteroscedasticity
SAVINGS=-1.062+0.295INCOME
(0.851) (0.075)
R
2
=0.137 [1.233] [0.152]
Original standard error (t*=3.94)
Revised standard error (t*=1.94)
Heteroscedasticity
Detection
Examine the residuals
(u
i
) = X
i
White Test
Breusch-Pagan Test
Park Test
Glejser Test
Heteroscedasticity
White test
Auxiliary regression
H
0
: (u
i
) =
u
- no heteroscedasticity
H
1
: (u
i
) =
i
H
0
is rejected when nR
2
is large
Heteroscedasticity
Estimation
Respecify the original model in such a way that resulting
disturbances are homoscedastic
i
i
i
o
i
i
X
u
X X
Y
+ +
(
=
(
1
1
| |
Heteroscedasticity
(0.222) (0.044)
SAVINGS
i
= 0.228 + 0.197 INCOME
i
(0.222) (0.044)
GLS (Generalized Least Squares)
Also known as weighted least squares
197 . 0
1
228 . 0 +
(
=
i i
i
INCOME INCOME
SAVINGS