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Predictability of the dry bulk shipping market by

BIFFEX
a a
Young-Tae Chang & Hak Bong Chang
a
Korean Ocean Research and Development institute , Ansan, P. O. Box 29, Seoul,
425-600, Republic of KoreaTel 82-345-(400)-6371; Fax 82-(345)-408-582/5820; E-mail:
ytchang@sari.kordi.re.kr
Published online: 29 Jul 2006.

To cite this article: Young-Tae Chang & Hak Bong Chang (1996) Predictability of the dry bulk shipping market by BIFFEX,
Maritime Policy & Management: The flagship journal of international shipping and port research, 23:2, 103-114, DOI:
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 Predictability of the dry bulk shipping market by
BIFFEX
YOUNG-TAE CHANG
and
HAK BONG CHANG
Korea Ocean Research and Development Institute, Ansan, P.O. Box 29,
Seoul, 425-600, Republic of Korea?

When BIFFEX (Baltic International Freight Futures Exchange) came into exis-
tence in 1985, many critics were pessimistic that it would have a successful future.
In spite of the eight year's surival of BIFFEX, a recent empirical study shows that
BIFFEX is not widely used as a hedging tool in the shipping community, unlike
the expectations and recommendations of many experts. One reason could be that
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BIFFEX may not be considered predictive of the physical market and, therefore,
investors might be suspicious of the hedging effect. The objective of this paper is
to test this argument by examining the predictability of BIFFEX in the dry bulk
shipping market. The major finding is that BIFFEX can accurately predict the
physical market up to six months. Prior to the real situation, the explainable
power ranges from 90% in a one-month advance to 23% in a six-month advance.

1. Introduction
It is widely accepted that the shipping industry is risky by nature. This can be seen by
the very fluctuating freight rates of the past. The riskiness of the industry is caused by
such factors as uncertainties in the demand for the service, costs, prices, techno-
logical developments, etc. [I]. Among divisions of shipping industry, dry bulk ship-
ping has been exposed to more risk in that the market seems to have been run by
almost perfect market principles. Dry bulk shipping is most competitive and com-
pletely non-regulated. Therefore, no person or organization can control the limit of
rise or fall of the price [2]. In other words, once the price moves downward or
upward, it can move to wherever it should go by a market situation influenced by
no control of the limit.
In such a circumstance, it is quite natural that a more accurate prediction of the
market and a reduction of the risk should be of primary concern to interest groups
such as shipowners, charterers, shippers, bankers, brokers and so on. The prediction
of the market appears to be a combination of scientific methods, for instance modern
forcasting tools, expertise approach, and perhaps an intuitive method. Therefore, it
must have the same history as that of the shipping business itself. In comparison with
the long history of the predicton of the shipping market, risk reduction approaches
are rather new. The most favorable approach for the reduction of risk may be
hedging, mainly through forward contracts and participation in the futures market.
Of these approaches, it is noteworthy that participation in the futures market of the
shipping industry has been most recently improved thanks to the existence of the

tTel 82-(345)-400-6371; Fax 82-(345)-408-5824/5820; E-mail: ytchang@sari.kordi.re.kr

0308-8839196 $12.00 0 1996 Taylor & Francis Ltd
 104 Young-Tae Chang and Hak Bong Chang

freight futures exchange (the Baltic International Freight Futures Exchange; known
as BIFFEX), the energy futures exchange, and the financial futures exchange.
BIFFEX can be the largest contributor to hedging as such when it is properly
used, since the freight rate risk is larger than any other risk for shipowners [3].
The opening of BIFFEX on 1 May 1985 was the achievement of almost 20 years
of lobbying and a great deal of effort by the shipping community. It is fair to say that
there were pessimistic views on its long time survival in the shipping industry at the
time of inception. Contrary to that pessimism, BIFFEX has celebrated its ninth
birthday and perhaps it is not too much of an exaggeration to say that it will
enjoy long success based on its achievements hitherto. Despite the fact that
BIFFEX was created as a hedging tool and has celebrated nine years' duration, it
is disappointing to hear arguments that it has not been effectively successful as such.
In fact, Cullinane's recent study [4,5] shows that BIFFEX is not widely known to
shipowners and further it has been more used for speculating purposes than as a
hedging tool. From these findings, three plausible reasons can be pointed out and the
objective of this paper is to test the validity of one of the three reasons.
First, people may not consider the correlation between freight rates of their
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underlying routes in the physical market and the market-representing index of dry
bulk shipping markets in BIFFEX, namely the Baltic Freight Index (BFI). BIFFEX
trades a daily published index of dry cargo freight rates. This is the Baltic Freight
Index and BFI supposedly represents the market situation as weighted average
freight of major various voyage routes and, to some extent, time charter routes
depending upon the tonlmile importance to the world freight market [6]. In case
BIFFEX traders do not believe that the representing market index, BFI, is related to
their concerned routes in the physical market as advertised in the BIFFEX market,
there is very little reason for BIFFEX to be used for hedging purposes. Second, it
would be difficult for BIFFEX traders to decide the size and level of hedging to
offset the potential risk in the physical market. In spite of the BIFFEX secretariat's
attempt to show how perfectly BIFFEX can hedge the risks in the physical market,
ordinary traders might feel that it is difficult to calculate how many lots they should
trade and at what price levels. This makes them less confident of their decisions, and
thus reluctant to participate in the market. The third reason is that BIFFEX might
be considered not to be predictive of future happenings in the dry bulk shipping
market and consequently for this reason people do not seem to actively trade in
BIFFEX for hedging purposes.
Of the three reasons, the first two have received much attention from academics
and the BIFFEX secretariat through rigorous research and routine investigation into
the extent of representing the dry bulk shipping market by BFI. In other words, the
correlation issue has been one of the most frequent research topics regarding
BIFFEX [3,7,8] to show how each constituent freight rate of BFI has been moving
with BFI itself. Furthermore the BIFFEX secretariat has been changing the consti-
tuent routes as well as the routes' weight in the composition of BFI based on routine
investigation. Therefore BFI is attempting to be a living representation of the dry
bulk shipping market. The second issue, the size and level of hedging, looks rather
complicated to exactly calculate the level and size from the ordinary traders' point of
view. A proper method of calculating an optimal hedging portfolio was presented by
Haralambides [7], and a simple method of calculating the level and size of the
hedging including the rule of thumb method was presented by Gray [3] for ordinary
people to better understand its nature. Therefore, it seems to these authors that the
 Predictability of the dry bulk shipping markets by BZFFEX 105

proper amount of attention has been paid to the first two issues which may be the
two apparent reasons for the lack of success of BIFFEX as a hedging device.
However, the third reason does not seem to have been delved into sufficiently to
present academic evidence of its limited success, even if some authors have indirectly
and very slightly touched upon this idea in their research [3,7,8,9]. Therefore, this
point appears to deserve to be more deeply analysed and it is the main objective of
this paper to investigate whether BIFFEX can predict the dry bulk shipping market
or not and, if so, how many months in advance.
A regression analysis is adopted for this test. The question of predictability of the
physical market by BIFFEX will be tested by regressing a surrogate index for the dry
bulk shipping market (BFI) on future prices (BIFFEX prices). In case the parameters
of the regression equations are estimated to be statistically significant, BIFFEX is
considered predictive and the degree of the variance explained by the equations (R')
will show to what extent BIFFEX can predict the physical market. To test the degree
of the advance, regression will be conducted from a case of one month prior to the
real situation to that of up to 24 months in advance. Each time unit is increased by
one month, therefore totalling 24 regression cases. It can be said that BIFFEX can
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predict the market in advance as the months up to the case of statistically sound
regression equation. The following section explains the model and data. The third
section will present and discuss the results of the test. The conclusion will be the final
part of this paper, making suggestions for further areas of research.

2. Model and data

As aforementioned, the model is a regression analysis, whereby BFI is the dependent
variable and the BIFFEX price is the independent variable, therefore BFI is
explained by the BIFFEX price. The regression analysis will show whether there
exists any dependency between the movement of BIFFEX prices and that of BFI
through related statistics, for instance t-value of the estimate. It will also show how
much of the movement of the BFI can be explained by the movement of the BIFFEX
prices through the R~ statistic.
For the purpose of this study, other approaches could be used, for instance, a time
series analysis. However, time series analyses generally involve laborious work in
model identification, parameter estimation and diagnostic checking, even in single
variate time series analysis [10,11] and if time series analysis is used, it must be
multivariate since it would involve BFI and BIFFEX series, therefore necessarily
requiring a transfer function, which makes the analysis much more complicated and
less practical [12]. As far as the objective of this study is concerned, the authors
believe that the method should be in accordance with 'principle of parsimony' and so
the time series analysis should be done in some other studies.
The BIFFEX prices reflect today's market evaluation on the future happenings of
the dry bulk shipping market and so this is to be used as the independent variable of
the regression equation. The results of regression analysis will show the predictability
of the dry bulk shipping market in the future by today's market analysts. For
instance, if the regression equation uses a BIFFEX price one year ahead of its
realization period (that is the future price of one year before the expiration date)
as the independent variable and the equation shows a statistically significant rela-
tionship between BFI and BIFFEX prices, this then implies that the future situation
of the dry bulk shipping market can be predicted one year in advance in the futures
market. The accuracy of this prediction is based on the extent of the explanatory
 106 Young-Tae Chang and Hak Bong Chang

power taken from the historical data. Thus, if BFI is regressed on the BIFFEX prices
from the nearest month to the expiration date to the farthest period, month by
month, the predictability of the dry bulk shipping market by the BIFFEX price
can be examined by checking up to which equation the statistics have significance
with how much R2. Based on this idea, the regression analysis is employed in this
study as its method along with the explanatory power of the equation (R2). The
statistical significance of the estimates in each equation will be focused on hereafter.
In notational form, the regression equation can be expressed as follows:
BFI, = a + P . BZFFEXq (1)
where BFIT is the Baltic Freight Index at time T, a P are parameters of the equation,
BIFFEXt,T is the price of BIFFEX at time t for the commodity expired at time T, t is
the present date, and T is the expiring date.
This equation shows that the estimated regression will be a simple linear regres-
sion with an intercept. Since the BIFFEX prices are supposed to be an expected spot
price in the physical market, it appears to be plausible to assume that the realized
price on the expiration date (BFIT) must have a linear relation with the expected
price (BIFFEXJ) as shown in the above equation. As the present date comes closer
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to expiration (that is the difference between t and T gets smaller), there must exist a
stronger correlation in the equation. To test this relationship, 24 regression analyses
were conducted subsequently from the time difference of one month up to two years
in one month increments (as explained in the introduction of this paper). Therefore,
before trying to estimate the parameters in the equation it is expected that the smaller
the value of T minus t is, the larger the correlation coefficient is in the equation,
consequently resulting in higher R2.
For each of the 24 regression equations, 24 data sets were prepared from the data
set 1 May 1985 to 10 June 1993 provided by the BIFFEX secretariat. The secretar-
iat's whole data set contained 15 820 records in its database with the fields being the
present date, the expiration date, the spot price, the future price, the trade volume
etc. [13]. On each transaction day there are likely to be eight to ten different kinds of
future commodities, since BIFFEX provides the futures of this month, next month,
January, April, July and October this year and four others next year, i.e. from this
month to two years ahead.
From this whole data set, the authors had to calculate and extract the spot prices
of the expiration date (BFIT) and the futures price of the present date, t, to be
expired at the future time, T(BIFFEX,T), on condition that the time difference
between t and T exactly matches the time lag of from one month to two years
each time by adding one month, making each raw data set for the regression.
Consequently there were 24 time searches for matching the lag in the whole data
set. As is often the case there were missing values necessarily requiring time consum-
ing work, even when using a fast personal computer. From these 24 data sets
prepared for the regression, the estimation and statistical tests were conducted in
each equation. The results are described in the next section.

3. Results and discussions

The regression analysis was conducted at three stages, namely the parameter estima-
tion stage, the statistical significance test stage, and the diagnostic checking of basic
assumptions stage. As for the parameter estimation, the OLS (Ordinary Least
Squared) method was used since the estimated parameters in the sample would
 Predictability of the dry bulk shipping markets by BIFFEX 107

represent true value of population with minimum variance of the estimated [14] if
certain basic assumptions are fulfilled in the data. Also, the OLS method is the most
popular and the most easily used method. The estimated parameters are, of course,
the a and ,B in the equation. Once the parameters are estimated, their statistical
significance is tested via t-value and p-value [15,16] of computer output. The diag-
nostic checking is to confirm the assumptions of Gauss-Markov theorem [17]. This is
not only to check whether residuals of the fitted line are uncorrelated with the
independent variable and residuals themselves, but also to check if the residuals
have a mean value of zero and normal distribution with constant variance.
Although the estimates show very good results with high R~ and t-value (low p-
value), however, if the basic assumptions are not satisfied, then the results cannot be
an efficient estimator any more. This process therefore becomes more important
nowadays and takes more time than other stages since the parameter estimation is
automatically and quickly handled by computer. In fact, it took the longest time in
this study to conduct the diagnostic checking and solve the problems of autocorrela-
tion, and is often the case with the time series data. This three stage process was
equally applied in the 24 regression equations from the lag of one month to the lag of
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two years by one-month increments. The process can be illustrated as follows.

In the case of one-month lag between the futures price and expired spot price,
the data contained 71 observation cases from 1 July 1985 (first observation of
BIFFEXt,~) and 31 July 1985 (first observation of BFIT) to 4 May 1993 (last obser-
vation of BIFFEXt,T) and 28 May 1993 (last observation of BFIT). Since up to July
1988, trades on 'spot' and 'prompt' months (that is this month and next month) were
not available, there were four observation cases a year in the data, but thereafter
twelve cases a year were observed in the data set of one-month lag. The same thing
applied to the data set of a two-month lag. With the 71 observation cases, scatter-
diagrams were plotted before the actual estimation of the parameters. The result can
be seen in figure 1, which shows a presumably strong linear relationship between the
futures prices and expired spot prices. The estimation was computed using a SAS/

----7

500 600 700 800 900 10iK) 1100 1200 1300 1400 1500 1600 1700
FUTURES PRICES
Figure 1. Scatterplot of BFI v. BIFFEX.
 108 Young-Tae Chang and Hak Bong Chang

STAT prackage [18] since the program is one of the most powerful statistical
packages with various skillful options and a powerful data management system.
The results of the one month lag case are expressed in the following equation:

where the value in parenthesis is the t-value of the estimate.

This equation shows that the regression line explains 89% of the total variance of
the dependent variable and the estimated value of the parameter is highly significant.
In other words, almost 90% of movements in BFI could be explained by the future
price of one-month lag. Equation (2) implies that a one unit movement of the
BIFFEX price one month before the expiration date is more likely to predict a
0.95 unit movement of BFI in the same direction.
Likewise, the same estimations for all the other equations were carried out and the
results are presented in table 1.
Table 1 shows the equation number from a one-month lag up to a two-years lag
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case, R ~ t-value,
, p-value and observation cases in each equation in the order of
column. At first glance, the table seems to imply that up to 20 months of lag cases,
the regression has significant meaning since these equations have significant numbers
in t-value and p-value. Other equations have insignificant numbers. For instance, the
first equation (one-month lag case) has 0.89 R ~23.7
, in t-value and 0.0001 in p-value;
thus it is very strongly explained by the independent variable and the estimates are

Table 1. Results before diagnostic checking.

Equation R~ t-value p-value cases
 Predictability of the dry bulk shipping markets by BZFFEX 109

highly significant. The illustration of the fitted line is presented in figure 2 using the
case of a one-month lag. The graph shows a rather typical linear relationship
between two variables.
If the diagnostic checking is not carried out, it can be concluded that for up to 20
months time lag, the BIFFEX can predict the movement of BFI to the extent of R ~ ,
although in cases of longer time lag the explaining power is very low. However, great
care should be taken before making any conclusion on the results of regression.
Based on the results of this estimation, diagnostic checking on the Gauss-Markov
assumptions was carried out as explained previously. As the regression model is a
simple regression with a single independent variable (and data were collected from
time series sets), the major check point was centred on residuals with particular
emphasis on the autocorrelation problem, normal distribution assumption, mean
value of zero assumption, and uncorrelation with the independent variable issue
[19]. The diagnosis can be done visually by plotting the residuals on the independent
variable and plotting predicted values on the dependent variables, etc. The plotting
of the one-month lag, for instance, is presented in the figures 3 and 4. Figure 3 shows
linear relationship between the predicted values and observed values of the depen-
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dent variable and figure 4 seems to present no correlation between the independent
variable and the residuals.
Although this visualization is more understandable and looks more convenient
for the diagnosis, it cannot lead to a decisive conclusion and test estimates should be
involved in confirming the diagnosis. Thanks to the various options of regression
analysis in the SAS package and other techniques, statistical tests for these assump-
tions were possible. The methods the writers of the paper used included the Durbin-
Watson test for autocorrelation, the correlation coefficients between residuals and
the independent variable to test the independence assumption between them, t-test
for checking the mean value of zero of residuals and the Shapiro-Wilk's estimator, W
to test the normal distribution of residuals. Accordingly, the test results of the
diagnosis are presented in table 2.

FUTURES PRICES

Figure 2. Fitted line of regression.

 Young-Tae Chang and Hak Bong Chang

' aaL.
y 500
,
700 300 1100 1300 1500 1700 1900
EXPIRED SPOT PRICES

Figure 3. Predicted value vs Y.

Downloaded by [University of Illinois Chicago] at 10:10 04 January 2015

In table 2, bold figures show the cases that cannot fulfil the Gauss-Markov
assumptions and thus it can be seen that all equations except the first one have a
positive autocorrelation problem and all other assumptions do not seem to be vio-
lated. The first column is the equation number in the ascending order of time lag, the
second column is the Durbin-Watson statistic for the autocorrelation check, the
third column the p-value of correlation coefficient = zero between independent
variable and residual, the fourth column the p-value of mean value of zero in resi-
duals, the fifth column the p-value of normal distribution of residuals, and in the
final column are the observation cases. All the p-values are rather high, therefore
satisfying the conditions of Gauss-Markov theorem and the only problem in com-
mon is the positive autocorrelation. Because of this autocorrelation problem, the

500 600 700 600 900 1000 1100 1200 1300 1400 1500 1800 1700
FUTURES PRICES

Figure 4. Plot of residual.

 Predictability of the dry bulk shipping markets by BIFFEX 111

Table 2. Results for diagnostic checking.

-

Equation p-value for p-value for

number D-W statistic d 0
p x , ~ e s i= p =0 S-W statistic Cases
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high values in R~ and t-value in table 1 must have been biased; after curing this bias,
the regression should be reinterpreted and very often results in quite different out-
puts. In fact, this study showed quite different results compared with the results
without diagnostic checking and curing the autocorrelation.
The reason for the autocorrelation problem could be one or a combination of
factors: omission of explanatory variable, mis-specification of the form of the rela-
tionship, or measurement error in the dependent variable [20]. Regardless of the
reason, the autocorrelation should be cured since the estimates are inefficient, there-
fore making the uncured regression results meaningless. Before presenting the results
after solving the autocorrelation problem, the method of curing the autocorrelation
will be explained in the following section.
Among various techniques to cure the autocorrelation, Durbin's two-step esti-
mator was applied [20]. This estimates correlation coefficient between the residual
and lagged residual in the first step and then uses this correlation coefficient to
estimate the parameters in the second step. It can be explained again in notation
form as follows.
Once again taking equation (1) in general form with error term (residual: e,),

where Y,: BFIT, X,: BIFFFEXt,~,and the error term e, is correlated with itself, so
when considering the first order autocorrelation it follows that
 112 Young-Tae Chang and Hak Bong Chang

where, v, is the noncorrelated error term with itself and mean value of zero with the
constant variance.
Multiplying one lagged equation (3) by rho then subtracting the result from
equation (3),

The error term of equation (5) becomes v, of equation (4) confirming noncorrelation
and the mean value of zero; therefore the parameters of equation (5), i.e. ol and P,
become unbiased and have minimum variance. So once the first order correlation in
residuals is estimated in the first step, the OLS method can be applied to the
equation (5) model using the estimated coefficient rho in the second step making
it possible to have efficient estimates of the parameters and accurate statistical
inference. This method was adopted for this study since it is easier and less iterative
to compute in the SAS package compared with other methods, for instance, the
Cochrane-Orcutt iterative process [20]. The regression procedure of SASISTAT
produces the first order autocorrelation coefficient just under the Durbin-Watson
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statistics (D), if the Durbin Watson option is given to the program; this coefficient
was therefore used to apply the OLS method to equation (5). Then, from the output
of the equation (5) model, autocorrelation was checked again using the Durbin-
Watson statistic to confirm the randomness of the residuals. The results are
presented in table 3.
The results in table 3 contain output up to ten months lag equation since further
regression was meaningless due to the very insignificant figures in the statistics. The
results are quite different from those of table 1, particularly in R ~ t-value
, and
p-value. In table 3, only six equations show significant figures in t-value and
p-value (bold faced figures are insignificant in the table) whereas most of the equa-
tions in table l showed significance, so it seems true to argue that positive auto-
correlation tends to overestimate t statistics and the significance level [20]. A more
important change in table 3 is a sharp decrease in the explaining power ( R ~ ) since
,
the R~ is about half that of table 1. It is therefore clear that without diagnostic
checking, the inference on the regression results must have been misleading. The
Durbin-Watson statistic in table 3 is quite interesting in that just by once incorpor-
ating the first order autocorrelation coefficient into the equation (5) model, the

Table 3. Results after solving autocorrelation.

Equation
number R~ t-value p-value D-W statistic Cases
 Predictability of the dry bulk shipping markets b y BIFFEX 113

regression results show noncorrelated figures in almost every equation of the table
from the Durbin-Watson statistic.
In sum, based on the results in table 3 it can be concluded that BIFFEX can
predict the physical market six months in advance at the maximum with an accuracy
ranging from about 90% in the case of a one-month lag to 23% in the case of a six-
months lag. The further lag models showed that there were no statistically significant
relationships between the movements of BFI and BIFFEX.

4. Conclusion
For hedging purposes in the dry bulk shipping market, which is regarded as one of
the most competitive markets in the world, BIFFEX was introduced in May 1985
and recently celebrated its ninth birthday. In spite of its longevity despite pessimistic
views on its future at the time of its inception, recent empirical study shows that it is
not widely used as a hedging tool in the shipping community as is recommended in
many academic papers. One reason for this phenomenon could be that BIFFEX is
considered not predictive of the physical market, namely, the dry bulk shipping
market, and therefore people might be suspicious of the hedging effect. The objective
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of this study was to test this argument by examining the predictability of BIFFEX on
the dry bulk shipping market.
The method in this study was to regress BFI as a surrogate for the dry bulk
shipping market on BIFFEX prices taking time lags between the present date of
the BIFFEX price and the expired date ranging from one month to two years by one
month increments, thus yielding 24 regression equations. For these 24 regression
models, parameter estimation, statistical tests and diagnostic checking on the basic
assumptions of the models were carried out. Although most of the equations showed
high value in R~ and t-value, the Durbin-Watson statistic implied positive autocor-
relation, so the autocorrelation was cured by using Durbin's two-step estimator,
whereby the first order autocorrelation coefficient was incorporated into the original
model and the OLS method was re-used, checking once again whether the autocor-
relation still remained or not. By using the first order autocorrelation coefficient only
once, the autocorrelation problem was deleted; however, the second results showed
quite different statistics which are believed to be the true value.
As a consequence of the regression analysis, it can be concluded that BIFFEX
prices can predict movements of the dry bulk shipping market up to six months at
the maximum prior to the real happenings in the physical market with an accuracy
ranging from 90% in the case of a one-month lag to 23% in the case of a six-months
lag. A further study area related to the topic of this study is to use a multivariate time
series analysis, e.g. a moving average model (MA), since the residuals showed posi-
tive first order autocorrelation while analyzing the error terms of the regression. This
would require another study due to the heavy and complicated processes of model
identification, parameter estimation and diagnostic checking of time series analyses.

References
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2. Although the rise of the price looks very fascinating from the shipowner's point of view
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risk of any investment, in academic terms, means variations of expected cash flow. In this
sense, the favourable rise of the rate is also risk.
3. GRAY,J . (1990), Shipping Futures (London: Lloyd's of London Press).
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CULLINANE, K. (1991), Who's using BIFFEX?: Results from a survey of shipowners.

Maritime Policy and Management, 18(2), 79-9 1.
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In a general type of database file, one record consists of multiple fields, whereas a field
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can be thought of as more or less one variable.

For this reason, the estimators of OLS method are called BLUE (Best Linear Unbiased
Estimator). Unbiased means the expected value of the estimates in the sample is equal to
the true value of population, Best means the estimators have minimum variance, and
Linear means that the parameters have linear relationship.
It is also called prob-value and is an excellent way to summarize what the data says
about the credibility of null hypothesis.
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Since the model had only a single independent variable and the data are not taken from
cross-section series, which often have a heteroscedastic problem, checking on the multi-
collinearity and heteroscedasticity problems was ignored.
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