Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

Multiple Regression Model:

Heteroskedasticity
Wooldridge (Chapter 8)
Dr. Rachida Ouysse
School of Economics
UNSW

Dr. Rachida Ouysse

FGLS

Prediction

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Lecture Plan

Consequences of heteroskedasticity for OLS estimation

Heteroskedasticity-robust inference

Testing for heteroskedasticity

Weighted (Generalized) least squares estimation

Feasible GLS

Prediction with FGLS

Linear probability model revisited

Dr. Rachida Ouysse

Prediction

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

What is heteroskedasticity?

= 0 + 1 x 1 + 2 x 2 + + k x k +

Recall MLR1-5 needed to prove that OLS is the BLUE:

- MLR5. Homoskedasticity: Var (u|x1 , , xk ) = 2
- The variance of what you dont observe (u) does not change as the
values of what you observe (x1 , , xk ) change
is heteroskedastic when it is not homoskedastic
- Heteroskedasticity: Var (u|x1 , , xk ) 6= 2
- The variance of what you dont observe () changes as the values of
what you observe (x1 , , xk ) change

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Homoskedasticity

Dr. Rachida Ouysse

Tests for Het

GLS and WLS

FGLS

Prediction

LPM

Introduction

Implications of HET

Het-robust inference

Heteroskedasticity

Dr. Rachida Ouysse

Tests for Het

GLS and WLS

FGLS

Prediction

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Simulate examples

Two sets of 1, 000 observations are simulated from the following

true model:
y

= 0 + 1 x + = 1 + 2x +

First, generate two random variables x and u in Stata

Then generate y = 1 + 2x + u
Data set 1 : is homoskedastic
Data set 2 : is heteroskedastic

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Heteroskedasticity
Homoskedasticity vs Heteroskedasticity

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Why do we care about heteroskedasticity? Reason I

The OLS estimator is unbiased and consistent when MLR 1-4 hold,

whether is homoskedastic or not

bj to test
But recall that we often want to use OLS estimates ,
something specific about the true parameters j
- Construct a test statistic appropriate to for the null hypothesis:
t=
F=

b c

j
b ),
se(
j

where se(bj ) =

(SSRr SSRur )/q

SSRur /(nk1)

Dr. Rachida Ouysse

SSR/(nk1)
SSTj (1Rj )

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Why do we care about heteroskedasticity? Reason I

MLR5 is required for using the formula of the variance of the OLS

estimator, which is important for inference.

Without MLR5, the usual standard errors are incorrect and the t-stat

(or F-stat) does not follow the t (or F) distribution and may lead to
wrong conclusions.
Without MLR5, the OLS is no longer asymptotically efficient.

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Why do we care about heteroskedasticity? Reason I

Under MLR1-4 and MLR5. homoskedasticity:

- t is approximately tnk1 -distributed and F is approximately
Fq,nk1 -distributed, in an arbitrarily large sample; or equivalently,
- t is approximately normally distributed and F is approximately
(1/q)2q distributed, in an arbitrarily large sample
Under MLR1-4, MLR5, and MLR6. normality:
- t is exactly tnk1 -distributed and F is exactly Fq,nk1 -distributed
(for any sample size)

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Why do we care about heteroskedasticity? Reason I

- The usual standard errors (and more generally the usual estimated
covariance matrix) incorrectly describe the sampling distribution of the
OLS estimator in a small sample as well as in an arbitrarily large sample.

- The usual t statistic does not follow the t-distribution and the usual F
statistic does not follow the F-distribution, regardless of however
(arbitrarily) large the sample is.

- A major implication: when we (fail to) reject the null hypothesis using
% significance level critical values, we cant tell whether we actually (fail
to) reject the null at the % level!

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

A little technical note on linear regression 1

Suppose that the following OLS estimates are available:

yi = b) + b1 x1i + b2 x2i +
bi
Econometricians hardly use

SSR/(nk1)
SSTj (1Rj )

to obtain se(bj ), for

j = 1, 2
Instead, we calculate something called the estimated covariance
matrix of the OLS estimator b = (b0 , b1 , b2 )0 :

b
c ()
var

est.var (b0 )

est.cov (b0 , b1 )
est.cov (b0 , b2 )

Turns out that se(bj ) =

est.cov (b0 , b1 )
est.var (b1 )
est.cov (b1 , b2 )

q
est.var (bj ) for j = 0, 1, 2

Dr. Rachida Ouysse

est.cov (b0 , b2 )

est.cov (b1 , b2 )
est.var (b2 )

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

A little technical note on linear regression 1

The same OLS estimates can be used to compute (at least) two

different estimated covariance matrices:

Usual covariance matrix: assumes homoskedasticity; need to know
b2

(SSR)

Heteroskedasticity-robust covariance matrix: need to know

b2i for

each i

d (bj ) =
Var

n
nk 1

Pn

rij
b2i
i =1 b
2
SSRj

In general a White het.robust covariance matrix estimator:

b =
d ()
Var

n
(X 0 X )1
nk 1

Dr. Rachida Ouysse

n
X
i =1

b2i xi x0i

(X 0 X )1

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Heteroskedasticity-robust inference

You are not expected to compute an estimated covariance matrix

manually: at least not until you take more advanced econometrics

courses
Our objectives:

- Learn how to tell Stata to calculate the robust covariance matrix

- Learn how to construct robust t statistics manually, using robust std
errors calculated by Stata
- Learn how to tell Stata to calculate robust F statistics
- Learn how to use robust t statistics and robust F statistics for
asymptotically valid inference
- Understand some key features of the robust test statistics

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Heteroskedasticity-robust inference

It is possible to adjust the OLS standard errors to make the t-stat (or

F-stat) valid in the presence of heteroskedasticity of unknown form.

The adjustment is called heteroskedasticity-robust procedure.
The procedure is robust because the adjusted t-stat (or F-stat) is

valid regardless of the type of heteroskedasticity in the population

(even if there is no heteroskedasticity).

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Obtain robust test stats in Stata (wage1.dta)

Load the data

use http : //fmwww .bc.edu/ec p/data/wooldridge/WAGE 1

OLS regression with the usual covariance matrix

regress lwage educ exper tenure

test exper = tenure = 0
OLS regression with the robust covariance matrix

regress lwage educ exper tenure, robust

test exper = tenure = 0
Ok, thats easy to follow... Now lets do the hard part ie

understanding the regression results

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Heteroskedasticity

A summary
y of regression
g
results

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Robust standard errors and robust t stats

The coefficients are not affected by whether you tell Stata to

compute the robust covariance matrix or not

- In both cases, the coefficient estimates are computed by minimizing
the sum of squared residuals
In general, robust standard errors can be smaller or larger than the

usual standard errors

- though in this particular example, robust std errors are larger
Robust std errors can be used to compute robust t-statistic in the

same way as usual std errors are used to compute t-stat

t=

bj c

bj )
r .se(

when H0 : j = c, where r .se(bj ) stands for the robust

std errors.

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

A note on robust F statistics

From earlier output:

- The coefficient estimates dont change SSR doesnt change
R-squared doesnt change
- Yet, usual F stat.= 49.69 6= robust F stat. = 37.10
How is it possible when everything relevant for calculating the F

statistic remains unchanged?

(R 2 R 2 )/q

r SSRur )/q
r
F = (SSR
= (1Rur
2
SSRur /(nk1)
ur )/(nk1)
- To prove that the usual F-stat we get using this formula is
F-distributed, we need to assume homoskedasticity

The robust F statistic is based on a Wald statistic which uses the

robust covariance matric

- a very different formula which doesnt depend on SSR or R 2

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

A note on robust F statistics

Under MLR1-MLR4 and in large sample:

The robust t-stat is approximately tnk1 -distributed
The robust F-stat is approximately (1/q)2q -distributed
Implications:
Compare robust test statistics against asymptotic critical values
- Use them exactly as how you use the usual test statistics under MLR1-MLR5
(remember lecture on OLS Asymptotics)

Since MLR1-MLR4 say nothing about the variance of ...

- The robust test statistics are asymptotically valid in the presence of

heteroskedasticity of unknown form
Also asymptotically valid when is homoskedastic

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Why do we care about heteroskedasticity? Reason II

We can test for heteroskedasticity... but Why?

Under MLR1-MLR5 and MLR6, usual t- and F-stats follow their

namesake distributions exactly even in a small sample

Robust statistics follow those distributions only approximately in a

large sample
Ok, what if our sample is really really large? Can we forget?

Under MLR1-MLR5, the OLS estimator is the BLUE whereas under

MLR1-MLR4, it is a (mere) LUE

Sometimes we can find a better LUE. And more generally, sometimes

we can find another CAN (consistent & asymptotically normally

distributed) estimator which is better.

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Testing for heteroskedasticity: basic strategy

How to test whether Var (|x1 , , xk ) changes as x1 , , xk

change assuming that MLR1-MLR4 hold?

Var (|x1 , , xk ) = E (2 |x1 , , xk )
because E (|x1 , , xk ) = 0
So we are interested in testing whether we can explain or predict 2

using x1 , , xk
Maybe we can estimate a simple linear model:

2 = E (2 |x1 , , xk ) + v = 0 + 1 x1 + 2 x2 + + k xk + v
and test the null hypothesis: i = 0 for i = 1, , k
The only problem is that we do not observe ?

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Breusch-Pagan test for heteroskedasticity

More precisely its modern variant due to Wooldridge
Step 1: estimate the linear model of interest using OLS

y = 0 + 1 x 1 + + k x k +
and compute squared residuals,
b2
Step 2: Estimate the following model (also called auxiliary

regression) using OLS

b2 = 0 + 1 x1 + + k xk + v
ie., regress
b2 against all explanatory variables used in Step 1.
Let Rb22 be the R-squared from the regression in Step 2
Step 3: test H0 : 1 = 2 = = k = 0 using either the usual F or

the usual LM test!

These tests are asymptotically equivalent
Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Breusch-Pagan test for heteroskedasticity

More details on Step 3

H0 : 1 = 2 = = k = 0 (Homoskedasticity)
H0 is false (Heteroskedasticity)
The F-test: test for overall significance of the auxiliary regression in

Step 2: F =

2
/k
R
b2

(1R 2 2 )/(nk1)

. It is distributed as Fk,nk1

The LM test: LM = n Rb22 . The LM statistic is distributed as 2k

As usual, reject the null of homoskedasticity if the computed test

statistic exceeds the critical value or if the p-value is lower than the
significance level.

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

White test for heteroskedasticity

Step 1 same as in Breush-Pagan

Step 2 (Auxiliary regression):b
2 = 0 + 1 yb + 2 yb2 + error

H0 : 1 = 2 = 0 (Homoskedasticity)
If reject: more general form of heteroskedasticity.
The F-test: test for overall significance of the auxiliary regression in

Step 2: F =

2
R
/2
b2

(1R 2 2 )/(n3)

. It is distributed as F2,n3

The LM test: LM = n Rb22 . The LM statistic is distributed as 22

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

8. Heteroskedasticity
Breusch-Pagan/White
tests in Stata

FGLS

Prediction

(Ch8)

sts

Breusch-Pagan
f Economics,
UNSWtest:

F = 3.63 (p-val = .013), LM = 10.76 (pval

= .013).
12

White test: F = 3.37 (p-val = .035), LM = 6.70 (p-val = .035).

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Weighted Least Squares: Motivation

When MLR5 fails, OLS is a mere LUE
Can sometimes find a better (read: with a smaller variance) LUE.

When exactly?
If the form of heteroskedasticity is known, then this knowledge

should be utilised in estimation.

Consider a special case where het. is in the form of a multiplicative

positive factor h(x1 , x2 , , xk ) h(x)

Var (|x1 , x2 , , xk ) = 2 h(x), h(x) > 0 known
The variance of u is a constant term which doesnt vary with
x1 , , xk multiplied by another term which does.
Examples of h(x):
2

(0 + 1 x1 + + k xk ) , exp (0 + 1 x1 + + k xk ).

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Weighted Least Squares: Motivation

Assume that you know everything about h(x).

In the context of examples above, not only the functional forms but
also the actual value of every single j
Using the result that Var (a X ) = a2 Var (X ), given that

Var (|x1 , , xk ) = 2 h(x), then


 p
Var / h(x) = 2
p

There will be no heteroskedasticity in /

h(x)
p
Hence, if the all variables are weighted by 1/ h(x), the model will
regain homoskedasticity.

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Weighted Least Squares: the mechanics

The linear model of interest:

y
Var (|x)

= 0 + 1 x1 + + k xk +
=

(1)

h(x)

- The OLS estimator is a LUE of the model parameters

Now lets weight each variable by 1/

y
p

= 0 p

p
h(x)

x1
xk

+ 1 p
+ + k p
+p
h(x)
h(x)
h(x)
h(x)

h(x)


Var |x = 2
h(x)

Dr. Rachida Ouysse

(2)

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Weighted Least Squares: the mechanics

The error term in this weighted regression is homoskedastic

The weighted regression model also satisfies MLR1-MLR4 when the

original model of interest does

Thus, in the presence of a completely known form of multiplicative

heteroskedasticity, the WLS estimator (=the OLS estimator applied

to the weighted regression) must be the BLUE by Gauss-Markov
Theorem.
One way to implement WLS in Stata: (h h(x))
regress

y
x1

1
h
h
h

x
k
h

Dr. Rachida Ouysse

(with the noconstant option)

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Feasible Generalized Least Squares

WLS is an example of GLS (Generalised Least Squares)

Now suppose that you know: Var (|x) = 2 h(x) and that

h(x) = exp(0 + 1 x1 + + k xk )
But you dont know everything about h(x): you dont know
j , j = 0, , k
- In this case, WLS is not feasible
What would be a feasible version of WLS here?
Estimate j and use the estimates in lieu of the true j

Dr. Rachida Ouysse

Prediction

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Feasible Generalized Least Squares

Feasible GLS:estimate h(x) to make GLS feasible
1 OLS: yi = 0 + 1 xi 1 + + k xik + i and save the residuals
bi
2 OLS: log(b
2i ) = 0 + 1 x1 + + k xk + error and save the fitted
values gbi
OR can an also use: log(b
2i ) = 0 + 1 ybi + k ybi2 + error and save
b
the fitted values gi
3 Set b
hi = exp(b
gi ) and estimate
x
xi 1
yi = 0 1 + 1
+ + k ik + i
b
hi

b
hi

b
hi

b
hi

b
hi

This approach is based on the flexible specification

Var (|x) = 2 exp (0 + 1 x1 + + k xk )

which leads to the regression in step (2).
Note that in step (2) 0 = log( 2 ) + 0

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

FGLS: Stata

Het-robust inference

Tests for Het

GLS and WLS

FGLS in Stata: student ed.

Dr. Rachida Ouysse

FGLS

Prediction

LPM

Introduction

Implications of HET

FGLS: Stata

Het-robust inference

Tests for Het

GLS and WLS

FGLS in Stata: deluxe ed.

Dr. Rachida Ouysse

FGLS

Prediction

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Feasible Generalized Least Squares

Feasible GLS (FGLS)

The FGLS estimators still estimate the original parameters in
yi = 0 + 1 xi 1 + + k xik + ui .
The interpretations of the parameters remain the same.
The FGLS is consistent, asymptotically normal and more efficient
than the OLS in the presence of het.
The associated t-stat and F-stat have the usual t and F distribution
for large n.
What if the h(x) function is wrong?
FGLS can be coupled with het.-robust standard errors.
Wooldridge argues that correcting for something is still better than

nothing as long as h(x) is flexibly specified

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Point prediction: Review

Predict = E (y |x1 = c1 , , xk = ck ) when model is

y = 0 + 1 x 1 + + k x k + u
- implies that = 0 + 1 c1 + + k ck
Estimate a reparameterised model:

y = 0 + 1 (x1 c1 ) + + k (xk ck ) + u
b of
using OLS to obtain OLS estimate b and the std. error, se(),
this point prediction.
Can construct an approximate 95% confidence interval of this point

b
prediction estimate as : b 1.96se()

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Point prediction: E (y |x = c)

The FGLS estimate, standard errors and approximate 95% CI

associated with point prediction can be obtained almost the same

way
Follow Steps 1 to 3 of FGLS estimation. Then in Step 4, estimate

the re-parametrised model

y
1
(x c )
(x c )
u
p = 0 p + 1 1p 1 + + k kp k + p
b
b
b
b
b
h
h
h
h
h
b from this weighted regression correspond
b and the std. error, se(),
to the FGLS estimate and standard error of the point prediction.
b gives the approximate 95% confidence interval.
b 1.96se()

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Point prediction: y |x = c
Now lets predict y for a person with x1 = c1 , , xk = ck :

0 + 1 c1 + + k ck + var (|x1 = c1 , , xk = ck )

+ var (|x1 = c1 , , xk = ck )

When is homoskedastic, the approx. 95% prediction interval for

this persons outcome is:

h
i1/2
b2+
b 1.96 se()
b2
- Homoskedasticity var (|x1 = c1 , , xk = ck ) = 2 for everyone.
When is heteroskedastic, we need to take into account the fact

that the error variance depends on this persons observed

characteristics

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Point prediction: y |x = c
In the FGLS, we have assumed that :

Var (|x1 = c1 , , xk = ck ) = 2 exp(0 + 1 x1 + + k xk )

Thus an approx. approx. 95% prediction interval for this persons

outcome in FGLS is:


1/2
b 2 + SSRFGLS exp(b
0 + b1 c1 + + bk ck )
b 1.96 se()
nk 1
- where b is the FGLS estimate of ,
b0 and bj s are obtained from
Step 2 of FGLS estimation. SSRFGLS is the SSR of the weighted
regression in Step 4.
- approx.: achieves the 95% confidence level in an arbitrarily large
sample
- approx.: kinda, because strictly speaking the formula is wrong!
Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Point prediction in log(y ) model

Suppose that everything is the same as before except that the dependent
variable is in log :
log(y ) = 0 + 1 x1 + + k xk + u

After running FGLS regression, and assuming that is normal conditional on

x1 + + xk , a point prediction E (y |x1 = c1 , , xk = ck ) can be estimated as:


\) + 0.5 SSRFGLS exp(b
yb = exp log(y
0 + b1 c1 + + bk ck )
nk 1
\) = b0 + b1 c1 + + bk ck , and bj refers to FGLS estimates.
where log(y

Can also compute the approx. approx. approx. 95% prediction interval for this
some one with same characteristics. (See p. 290 if interested)

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Linear probability model (LPM) revisited

In the LPM, y is binary and the form of heteroskedasticity is known:

Var(|x1 , , xk )

Var(y |x1 , , xk )

P(y = 1|x) [1 P(y = 1|x)]

E (y |x) [1 E (y |x)]

So, if we can find an estimate for the variance, that is an estimate for E (y |x) or
for the P(y |x), we can use FGLS

For the i th observation, we use OLS fitted value to construct ybi as an estimate
for E (y |x): E\
(yi |xi ) = ybi . We then construct:
b
hi = ybi (1 ybi )

If the fitted value is not inside (0, 1), FGLS should NOT be used.

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Linear probability model (LPM) revisited

The model: y = 0 + 1 x1 + + k xk + is then estimated by

WLS with weights {1/b

hi }
Example: Married Women labour force participation.
1

OLS: n = 753, R 2 = .264, R = .257

c
inlf

.586 + .038 educ .262 kidslt6 +

(.154)
[.152]

(.007)
[.007]

(.034)
[.032]

Some fitted values are outside (0, 1).

2
3

WLS(FGLS):
c
inlf

.591 + .020 educ .209 kidslt6 +

(.104)

(.004)

(.012)

ONE more year of education, holding everything else fixed, increases

the probability of in-labour-force by 0.020.

Dr. Rachida Ouysse

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

8. Heteroskedasticity (Ch8)
LPM-FGLS: Stata
Linear probability model (LPM) and WLS

ie_Slides08

my, School of Economics, UNSW

Dr. Rachida Ouysse

22

LPM

Introduction

Implications of HET

Het-robust inference

Tests for Het

GLS and WLS

FGLS

Prediction

Summary

How does heteroskedasticity invalidate the usual test procedures?

Why do we prefer het.-robust standard errors in OLS inference?
What are Breusch-Pagan test and White test?
What is WLS and what is FGLS?
Why is WLS (FGLS) superior to OLS in the presence of het...
What is the conditional variance of in the LPM model? Can it be

used in WLS estimation?

Dr. Rachida Ouysse

LPM