Econometrics HT 18
Chapter 23 : Heteroscedasticity
By Lund University
When the variance of the error term no longer is constant.
Heteroscedasticity
Heteroscedasticity means that the variance of the error term is different between different observations and this is very common in economics. We begin by looking at tests helping us figuring out if our data is homoscedastic or heteroscedasticity. If we find that we have heteroscedasticity, then the standard errors derived by assuming homoscedasticity are no longer valid. Instead, we can use robust standard errors. Also, with heteroscedasticity OLS is no longer efficient. In this case, the efficient estimator is called the weighted least squares.