Practical Econometrics Data collection Analysis and Application 1st Edition Hilmer Test Bank

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 Chapter 09

Heteroskedasticity

Multiple Choice Questions

1. Heteroskedasticity occurs when

A. the error variance is constant.

B. the error variance is non-constant.
C. the dependent variable variance is constant.
D. the dependent variable variance is non-constant.

2. Homoskedasticity occurs when

A. the error variance is constant.

B. the error variance is non-constant.
C. the dependent variable variance is constant.
D. the dependent variable variance is non-constant.

3. Heteroskedasticity violates assumption

A. M3.
B. M4.
C. M5.
D. M6.

4. Heteroskedasticity is a problem because it results in

A. biased parameter estimates.

B. estimated standard errors that are incorrect.
C. estimated standard errors that are always too small.
D. incorrect estimated slope coefficients.

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5. A simple way to generate some idea whether data are likely to be heteroskedastic is to

A. examine the residual plot.

B. construct a histogram.
C. calculate the variance of the sample.
D. plot the data points from smallest to largest.

6. Suppose that you plot the residuals for your sample against independent variable x and get

You should conclude that the data are

A. definitely heteroskedastic.
B. likely homoskedastic.
C. possibly heteroskedastic and you would perform a formal test for heteroskedasticity.
D. possibly homoskedastic and you would perform a correction for homoskedasticity.

9-2
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7. Suppose that you plot the residuals for your sample and get

You should conclude that

A. definitely heteroskedastic.
B. likely homoskedastic.
C. possibly heteroskedastic and you would perform a formal test for heteroskedasticity.
D. possibly homoskedastic and you would perform a correction for homoskedasticity.

8. The null hypothesis for testing for the presence of heteroskedasticity is

A. H0 : the error term has constant variance.

B. H0 : the error term has non-constant variance.
C. H0 : β1 = 0.
D. H0 : Ɛ1 = 0.

9. The first step in the Breusch-Pagan test is to estimate the model and

A. calculate the predicted values of the dependent variable.

B. calculate the estimated residuals.
C. plot the estimated residuals.
D. test whether the residuals are non-constant.

10. The second step in the Breusch-Pagan test is to regress the

A. residuals on the independent variables from the original OLS regression.

B. squared residuals on the residuals from the original OLS regression.
C. squared residuals on the independent variables from the original OLS regression.
D. residuals on the squared residuals from the original OLS regression.

9-3
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11. The final step in the Breusch-Pagan test is to perform

A. an F-test of the overall significance of the squared residuals regression.

B. an F-test of the overall significance of the original OLS regression.
C. a t-test of the overall significance of the squared residuals regression.
D. an F-test of the individual significance of the suspect independent variable in the squared residuals
regression.

12. The first step in the Modified White's test is to estimate the model and

A. calculate the predicted values of the dependent variable.

B. calculate the estimated residuals.
C. calculate the estimated residuals and the predicted values of the dependent variable.
D. plot the estimated residuals.

13. The second step in the Modified White's test is to regress the

A. residuals on the predicted value of the dependent variable.

B. squared residuals on the predicted value of the dependent variable.
C. squared residuals on the predicted value of the dependent variable squared.
D. squared residuals on the predicted value of the dependent variable and the predicted value of the
dependent variable squared.

14. Suppose that while performing the Modified White's test, you estimate the model

The final step in the Modified White's test is to perform

A. an F-test of the overall significance of the squared residuals regression.

B. an F-test of the joint significance of δ1 and δ2.
C. a t-test of the individual significance of δ1.
D. a t-test of the individual significance of δ2.

15. The first step in the Goldfeld-Quandt test is to

A. estimate the model and calculate the estimated residuals.

B. estimate the model and calculate the estimated residuals squared.
C. sort the data set from the lowest to the highest value of the dependent variable.
D. sort the data set from the lowest to the highest value of the suspect independent variable.

9-4
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16. The second step in the Goldfeld-Quandt test is to

A. omit the middle c observations from the ordered data set.

B. omit the bottom c observations from the ordered data set.
C. regress the squared residuals on the independent variables from the original OLS regression.
D. regress the squared residuals on the predicted value of the dependent variable from the original
OLS regression.

17. The third step in the Goldfeld-Quandt test is to calculate the estimated sample regression function for
the

A. bottom c observations in the ordered data set.

B. middle c observations in the ordered data set.
C. top c observations in the ordered data set.
D. bottom c and the top c observations in the ordered data set.

18. The final step in the Goldfeld-Quandt test is to

A. perform an F-test of the overall significance of the estimated sample regression functions.
B. calculate the Goldfeld-Quandt test statistic and compare it to the appropriate critical value.
C. compare the calculated R2 values for the estimated sample regression functions.
D. a t-test of the individual significance of the suspect independent variable in the squared residuals
regression.

19. The null hypothesis for the Goldfeld-Quandt test is

A.

B.

C.

D.

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20. The alternative hypothesis for the Goldfeld-Quandt test is

A.

B.

C.

D.

21. The Goldfeld-Quandt test statistic is

A.

B.

C.

D.

22. The appropriate critical value for performing the Goldfeld-Quandt test at the 95% level is

A.

B.

C.

D.

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23. The rejection rule for the Goldfeld-Quandt test at the 95% level is reject H0 if

A.

B.

C.

D.

24. Weighted Least Squares is performed by

A. re-weighting the estimated standard errors from the OLS regression.

B. re-weighting the estimated slope coefficients from the OLS regression.
C. including the command ",robust" in the estimation.
D. re-weighting the original data so that OLS provides estimated standard errors with minimum
variance.

25. Suppose you wish to explain variation in body mass index (BMI) by variation in height (in inches) by
estimating the model

and you suspect heteroskedasticity of the form . You could perform

Weighted Least Squares by estimating the model

A. .
B.
.
C.
.
D. .

26. White's Heteroskedastic standard errors are

A. the preferred method for correcting for potential heteroskedasticity.

B. calculated through an iterative process.
C. automatically calculated in Excel.
D. the result of performing weighted least squares.

9-7
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Short Answer Questions

27. What is heteroskedasticity? Why is it problematic? Explain.

28. What are the null and alternative hypothesis for testing for the presence of heteroskedasticity? Why?
Explain.

29. How do you perform the Breusch-Pagan test for heteroskedasticity? Explain.

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30. What is the intuition behind the Breusch-Pagan test for heteroskedasticity? Explain.

31. How do you perform the modified White's test for heteroskedasticity? Explain.

32. What is the intuition behind the modified White's test for heteroskedasticity? Explain.

33. How do you perform the Goldfeld-Quandt test for heteroskedasticity? Explain.

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34. What is the intuition behind the Goldfeld-Quandt test for heteroskedasticity? Explain.

35. How do you perform Weighted Least Squares? Why should it work? Explain.

36. Why are White's heteroskedastic consistent standard errors the preferred method for dealing with
potential heteroskedasticity? Explain.

Essay Questions

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37. Suppose you are interested in explaining variation in Body Mass Index in a nationally-representative
sample of 12,486 men and women and that you estimate the sample regression function (standard
errors in parentheses)

a) Which variable do you suspect could be responsible for heteroskedasticity in this model? Why?
Explain.
b) How would you use the Breusch-Pagan test to determine whether heteroskedasticity is present?
Explain.
c) How would you use Weighted Least Squares to account for heteroskedasticity if it is present?
Explain.

38. Suppose you are interested in explaining variation in Mile Run Time in a sample of 22,359 individuals
over the age of 18 and that you estimate the sample regression function (standard errors in
parentheses)

a) Which variable do you suspect could be responsible for heteroskedasticity in this model? Why?
Explain.
b) How would you use the modified White's test to determine whether heteroskedasticity is present?
Explain.
c) What would be your most preferred method for correcting for the potential heteroskedasticity?
Explain.

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39. Suppose you are interested in explaining variation in Vacation Spending in a sample of 12,486 men and
women and that you estimate the sample regression function (standard errors in parentheses)

a) Which variable do you suspect could be responsible for heteroskedasticity in this model? Why?
Explain.
b) How would you use the Goldfeld-Quandt test to determine whether heteroskedasticity is present?
Explain.
c) Suppose you know that heteroskedasticity takes the form . How would
you use Weighted Least Squares to correct for the heteroskedasticity? Explain.

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 Chapter 09 Heteroskedasticity Answer Key

Multiple Choice Questions

1. Heteroskedasticity occurs when

A. the error variance is constant.

B. the error variance is non-constant.
C. the dependent variable variance is constant.
D. the dependent variable variance is non-constant.

2. Homoskedasticity occurs when

A. the error variance is constant.

B. the error variance is non-constant.
C. the dependent variable variance is constant.
D. the dependent variable variance is non-constant.

3. Heteroskedasticity violates assumption

A. M3.
B. M4.
C. M5.
D. M6.

4. Heteroskedasticity is a problem because it results in

A. biased parameter estimates.

B. estimated standard errors that are incorrect.
C. estimated standard errors that are always too small.
D. incorrect estimated slope coefficients.

5. A simple way to generate some idea whether data are likely to be heteroskedastic is to

A. examine the residual plot.

B. construct a histogram.
C. calculate the variance of the sample.
D. plot the data points from smallest to largest.

9-13
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6. Suppose that you plot the residuals for your sample against independent variable x and get

You should conclude that the data are

A. definitely heteroskedastic.
B. likely homoskedastic.
C. possibly heteroskedastic and you would perform a formal test for heteroskedasticity.
D. possibly homoskedastic and you would perform a correction for homoskedasticity.

7. Suppose that you plot the residuals for your sample and get

You should conclude that

A. definitely heteroskedastic.
B. likely homoskedastic.
C. possibly heteroskedastic and you would perform a formal test for heteroskedasticity.
D. possibly homoskedastic and you would perform a correction for homoskedasticity.

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8. The null hypothesis for testing for the presence of heteroskedasticity is

A. H0 : the error term has constant variance.

B. H0 : the error term has non-constant variance.
C. H0 : β1 = 0.
D. H0 : Ɛ1 = 0.

9. The first step in the Breusch-Pagan test is to estimate the model and

A. calculate the predicted values of the dependent variable.

B. calculate the estimated residuals.
C. plot the estimated residuals.
D. test whether the residuals are non-constant.

10. The second step in the Breusch-Pagan test is to regress the

A. residuals on the independent variables from the original OLS regression.

B. squared residuals on the residuals from the original OLS regression.
C. squared residuals on the independent variables from the original OLS regression.
D. residuals on the squared residuals from the original OLS regression.

11. The final step in the Breusch-Pagan test is to perform

A. an F-test of the overall significance of the squared residuals regression.

B. an F-test of the overall significance of the original OLS regression.
C. a t-test of the overall significance of the squared residuals regression.
D. an F-test of the individual significance of the suspect independent variable in the squared
residuals regression.

12. The first step in the Modified White's test is to estimate the model and

A. calculate the predicted values of the dependent variable.

B. calculate the estimated residuals.
C. calculate the estimated residuals and the predicted values of the dependent variable.
D. plot the estimated residuals.

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13. The second step in the Modified White's test is to regress the

A. residuals on the predicted value of the dependent variable.

B. squared residuals on the predicted value of the dependent variable.
C. squared residuals on the predicted value of the dependent variable squared.
D. squared residuals on the predicted value of the dependent variable and the predicted value of
the dependent variable squared.

14. Suppose that while performing the Modified White's test, you estimate the model

The final step in the Modified White's test is to perform

A. an F-test of the overall significance of the squared residuals regression.

B. an F-test of the joint significance of δ1 and δ2.
C. a t-test of the individual significance of δ1.
D. a t-test of the individual significance of δ2.

15. The first step in the Goldfeld-Quandt test is to

A. estimate the model and calculate the estimated residuals.

B. estimate the model and calculate the estimated residuals squared.
C. sort the data set from the lowest to the highest value of the dependent variable.
D. sort the data set from the lowest to the highest value of the suspect independent variable.

16. The second step in the Goldfeld-Quandt test is to

A. omit the middle c observations from the ordered data set.

B. omit the bottom c observations from the ordered data set.
C. regress the squared residuals on the independent variables from the original OLS regression.
D. regress the squared residuals on the predicted value of the dependent variable from the original
OLS regression.

17. The third step in the Goldfeld-Quandt test is to calculate the estimated sample regression function
for the

A. bottom c observations in the ordered data set.

B. middle c observations in the ordered data set.
C. top c observations in the ordered data set.
D. bottom c and the top c observations in the ordered data set.

9-16
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18. The final step in the Goldfeld-Quandt test is to

A. perform an F-test of the overall significance of the estimated sample regression functions.
B. calculate the Goldfeld-Quandt test statistic and compare it to the appropriate critical value.
C. compare the calculated R2 values for the estimated sample regression functions.
D. a t-test of the individual significance of the suspect independent variable in the squared
residuals regression.

19. The null hypothesis for the Goldfeld-Quandt test is

A.

B.

C.

D.

20. The alternative hypothesis for the Goldfeld-Quandt test is

A.

B.

C.

D.

21. The Goldfeld-Quandt test statistic is

A.

B.

C.

D.

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22. The appropriate critical value for performing the Goldfeld-Quandt test at the 95% level is

A.

B.

C.

D.

23. The rejection rule for the Goldfeld-Quandt test at the 95% level is reject H0 if

A.

B.

C.

D.

24. Weighted Least Squares is performed by

A. re-weighting the estimated standard errors from the OLS regression.

B. re-weighting the estimated slope coefficients from the OLS regression.
C. including the command ",robust" in the estimation.
D. re-weighting the original data so that OLS provides estimated standard errors with minimum
variance.

9-18
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25. Suppose you wish to explain variation in body mass index (BMI) by variation in height (in inches) by
estimating the model

and you suspect heteroskedasticity of the form . You could perform

Weighted Least Squares by estimating the model

A. .
B.
.
C.
.
D. .

26. White's Heteroskedastic standard errors are

A. the preferred method for correcting for potential heteroskedasticity.

B. calculated through an iterative process.
C. automatically calculated in Excel.
D. the result of performing weighted least squares.

Short Answer Questions

27. What is heteroskedasticity? Why is it problematic? Explain.

Heteroskedasticity occurs when the error term does not have constant variance. It is a violation of
multiple linear regression M6. By violating assumption M6, heteroskedasticity prevents OLS
estimates from being BLUE because it results in standard errors that are not minimum variance
among the class of unbiased estimators.

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28. What are the null and alternative hypothesis for testing for the presence of heteroskedasticity?
Why? Explain.

The null hypothesis for testing for the presence of heteroskedasticity is that the error term has
constant variance . The alternative hypothesis is that the error term
has non-constant variance . The reason for this is that if we can reject
that null hypothesis that the error term has constant variance, then we can conclude that it has
non-constant variance, meaning that our heteroskedasticity is present in our data.

29. How do you perform the Breusch-Pagan test for heteroskedasticity? Explain.

You perform the Breusch-Pagan test by: (1) estimating the population regression model and
calculating the squared residuals, (2) regressing the squared residuals on all of the independent
variables from the initial regression, and (3) performing an F-test for the overall significance of that
regression and concluding that heteroskedasticity is present in the data if you find the overall
regression to be statistically significant.

30. What is the intuition behind the Breusch-Pagan test for heteroskedasticity? Explain.

The intuition behind the Breusch-Pagan test is that if heteroskedasticity is not present, then there
should not be any observed correlation between the squared residuals and the independent
variables whereas if heteroskedasticity is present, then there should be observed correlation
between the squared residuals and the independent variables. Hence, if we find significantly statistic
correlation between the squared residuals and the independent variables then we should reject the
null hypothesis of homoskedasticity and conclude that heteroskedasticity is present in our data.

31. How do you perform the modified White's test for heteroskedasticity? Explain.

You perform the modified White's test for heteroskedasticity test by: (1) estimating the population
regression model and calculating the predicted value of the dependent variable, the squared
residuals, and the predicted value of the dependent variable squared (2) regressing the squared
residuals on the predicted value of the dependent variable and the predicted value of the dependent
variable squared, and (3) performing an F-test for the joint significance of the predicted value of the
dependent variable and the predicted value of the dependent variable squared and concluding that
heteroskedasticity is present in the data if you find the variables to be jointly significant.

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32. What is the intuition behind the modified White's test for heteroskedasticity? Explain.

The intuition behind the modified White's test for heteroskedasticity is that if heteroskedasticity is
not present, then there should not be any observed correlation between the squared residuals and
the predicted value of the dependent variable and the predicted value of the dependent variable
squared whereas if heteroskedasticity is present, then there should be observed correlation
between those variables. Hence, if we find significantly statistic correlation between the squared
residuals and the predicted value of the dependent variable and the predicted value of the
dependent variable squared then we should reject the null hypothesis of homoskedasticity and
conclude that heteroskedasticity is present in our data.

33. How do you perform the Goldfeld-Quandt test for heteroskedasticity? Explain.

You perform the Goldfeld-Quandt test for heteroskedasticity by: (1) sorting the data set from
lowest to highest value of the suspect independent variable, (2) omitting the middle c observations
and running separate regression for the lowest c and the highest c observations, and (3) calculating
the Goldfeld-Quandt test statistic GC = USS2/USS1, comparing that value to the appropriate able
value and concluding that heteroskedasticity is present in the data if you find GC to be sufficiently
large.

34. What is the intuition behind the Goldfeld-Quandt test for heteroskedasticity? Explain.

The intuition behind the Goldfeld-Quandt test for heteroskedasticity is that if heteroskedasticity is
not present, then Unexplained Sum of Squares should not differ significantly between the two
separate regressions and GC = USS2/USS1 should be close to 1 whereas if heteroskedasticity is
present, then the USS should be significantly larger for one regression than for the other and GC =
USS2/USS1 should be significantly greater than 1. Hence, if we calculate a value for GC that is
sufficiently large, we should reject the null hypothesis of homoskedasticity and conclude that
heteroskedasticity is present in our data.

35. How do you perform Weighted Least Squares? Why should it work? Explain.

You perform Weighted Least Squares by: (1) assuming the specific form that the heteroskedasticity
takes on, (2) using that assumed value to convert the original heteroskedastic data into a weighted
form that is not heteroskedastic, and (3) running OLS on the weighted data.

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36. Why are White's heteroskedastic consistent standard errors the preferred method for dealing with
potential heteroskedasticity? Explain.

Because they are very, very easy to compute (reg y x, robust in Stata) and the cost of not
correcting for heteroskedasticity is high.

Essay Questions

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37. Suppose you are interested in explaining variation in Body Mass Index in a nationally-representative
sample of 12,486 men and women and that you estimate the sample regression function (standard
errors in parentheses)

a) Which variable do you suspect could be responsible for heteroskedasticity in this model? Why?
Explain.
b) How would you use the Breusch-Pagan test to determine whether heteroskedasticity is present?
Explain.
c) How would you use Weighted Least Squares to account for heteroskedasticity if it is present?
Explain.

a. It seems most reasonable that Age is likely responsible for heteroskedasticity if present in this
model. The hypothesis would be that as people get older the variance of BMI increases.

b. To use the Breusch-Pagan test

(1) Estimate the original regression model, save and square the residuals.

(2) Regress the squared residuals on female and age.

(3) Test the hypothesis that H0 : δ1 = δ2 = 0. An easy way to do so is to look at the

Significance F from the regression in step (2) and Reject H0 if Significance F < 0.05. If the null
hypothesis is rejected then this is evidence of heteroskedasticity. If you fail to reject the null
hypothesis then this is evidence of homoskedasticity.

c. To use Weighted Least Squares you need to know the exact form of heteroskedasticity. Assume
the form of heteroskedasticity is h(x) = σ2Agei. As age increases so does the variance of the error
term. Because we have assumed the exact form of heteroskedasticity, we can use weighted least
squares. Estimate the model

The reason that weighted least squares works is that

The variance of the error term of the weighted least squares model no longer depends on i, or in

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 other words it is now homoskedastic.

38. Suppose you are interested in explaining variation in Mile Run Time in a sample of 22,359 individuals
over the age of 18 and that you estimate the sample regression function (standard errors in
parentheses)

a) Which variable do you suspect could be responsible for heteroskedasticity in this model? Why?
Explain.
b) How would you use the modified White's test to determine whether heteroskedasticity is
present? Explain.
c) What would be your most preferred method for correcting for the potential heteroskedasticity?
Explain.

a. The variable that would be responsible for heteroskedasticity could really be any of the three
independent variables. Possibly the most likely culprit is Days Exercise per Week because there are
many different types of exercise and as the days go up the variance of the error term will also
increase.

b. To use the Modified White's test

(1) Estimate the original regression model, save and square the residuals, save the predicted values
and square the predicted values.

(2) Regress the squared residuals on the predicted values and the predicted values squared.

(3) Test the hypothesis that H0 : δ1 = δ2 = 0. An easy way to do so is to look at the Significance F
from the regression in step (2) and Reject H0 if Significance F < 0.05. If the null hypothesis is
rejected then this is evidence of heteroskedasticity. If you fail to reject the null hypothesis then this
is evidence of homoskedasticity.

c. Because the exact for of heteroskedasticity is not known, White's robust standard errors are the
preferred method for corrected for heteroskedasticity. Unfortunately, Excel won't compute this type
of standard errors but other more advanced statistical packages will.

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39. Suppose you are interested in explaining variation in Vacation Spending in a sample of 12,486 men
and women and that you estimate the sample regression function (standard errors in parentheses)

a) Which variable do you suspect could be responsible for heteroskedasticity in this model? Why?
Explain.
b) How would you use the Goldfeld-Quandt test to determine whether heteroskedasticity is
present? Explain.
c) Suppose you know that heteroskedasticity takes the form . How would
you use Weighted Least Squares to correct for the heteroskedasticity? Explain.

a. It seems most reasonable that Income is likely responsible for heteroskedasticity if present in
this model. The hypothesis would be that as people's income increases the variance of Vacation
Spending increases.

b. To perform the Goldfeld-Quandt test you do the following

(1) Sort all the data by population from smallest to largest.

(2) Omit the middle n/3 observations.

(3) Run a regression with only the smallest n/3 observations.

(4) Run a regression with only the largest n/3 observations.

(5) Create the GQ statistic by dividing the larger MSUnexplained from steps (3) or (4) by the smaller
MSUnexplained from stets (3) or (4).

(6) If the GQ is greater than the tabled value then reject the null hypothesis and conclude the
model suffers from heteroskedasticity. If the GQ value is less than the tabled value then fail to
reject the null hypothesis and conclude the model is homoskedastic.

c. To use Weighted Least Squares you need to know the exact form of heteroskedasticity.
In this case the form of heteroskedasticity is h(x) = Incomei2 ∙ σ2. As income increases so does the
variance of the error term. Because we have assumed the exact form of heteroskedasticity, we can
use weighted least squares. Estimate the model

The reason that weighted least squares works is that

9-25
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McGraw-Hill Education.
Practical Econometrics Data collection Analysis and Application 1st Edition Hilmer Test Bank

The variance of the error term of the weighted least squares model no longer depends on i, or in
other words it is now homoskedastic.

9-26
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McGraw-Hill Education.

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