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dougherty3e_ch07

# dougherty3e_ch07 - Dougherty Introduction to Econometrics...

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Dougherty: Introduction to Econometrics 3e Study Guide Chapter 7 Heteroscedasticity Overview This chapter begins with a general discussion of homoscedasticity and heteroscedasticity: the meanings of the terms, the reasons why the distribution of a disturbance term may be subject to heteroscedasticity, and the consequences of the problem for OLS estimators. It continues by presenting several tests for heteroscedasticity and methods of alleviating the problem. It shows how apparent heteroscedasticty may be caused by model misspecification. It concludes with a description of the use of heteroscedasticity-consistent standard errors. Learning outcomes After working through the corresponding chapter in the text, studying the corresponding slideshows, and doing the starred exercises in the text and the additional exercises in this guide, you should be able to: explain the concepts of homoscedasticity and heteroscedasticity describe how the problem of heteroscedasticity may arise explain the consequences of heteroscedasticity for OLS estimators, their standard errors, and t and F tests perform the Goldfeld–Quandt test for heteroscedasticity perform the White test for heteroscedasticity explain how the problem of heteroscedasticity may be alleviated explain why a mathematical misspecification of the regression model may give rise to a problem of apparent heteroscedasticity explain the use of heteroscedasticity-consistent standard errors. Additional exercises A7.1 Is the disturbance term in your CES expenditure function heteroscedastic? Sort the data by EXPPC , regress CATPC on EXPPC and SIZE , and perform a Goldfeld–Quandt test to test for heteroscedasticity in the EXPPC dimension. Repeat using LGCATPC as the dependent variable. A7.2 The observations for the occupational schools (see Chapter 5 in the text) in the figure suggest that a simple linear regression of cost on number of students, restricted to the subsample of these schools, would be subject to heteroscedasticity. Download the data set from the heteroscedastic data sets folder on the website and use a Goldfeld–Quandt test to investigate whether this is the case. If the relationship is heteroscedastic, what could be done to alleviate the problem? © Christopher Dougherty, 2007 The material in this book has been adapted and developed from material originally produced for the degrees and diplomas by distance learning offered by the University of London External System ( www.londonexternal.ac.uk )

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Dougherty: Introduction to Econometrics 3e Study Guide 0 100,000 200,000 300,000 400,000 500,000 600,000 0 200 400 600 800 1,000 1,200 Occupational schools Regular schools N COST A7.3 A researcher hypothesizes that larger economies should be more self-sufficient than smaller ones and that M / G , the ratio of imports, M , to gross domestic product, G , should be negatively related to G : u G G M + + = 2 1 ββ with β 2 < 0. Using data for a sample of 42 countries, with M and G both measured in US\$ billion, he fits the regression (standard errors in parentheses): ^ G M = 0.37 – 0.000086 G R 2 = 0.12 (1) (0.03) (0.000036)
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dougherty3e_ch07 - Dougherty Introduction to Econometrics...

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