17 views

Uploaded by Ndivhuho Neosta

notes

- Manfred Gartner Et Bjorn Griesbach 2012_rating Agencies, Self-fulfilling Prophecy and Multiple Equilibria
- An Analysis
- Econometric s
- Frm Aim Statements 2014-Web
- Data Regresi Suhu Dingin
- Econ Assignment 3 1a e
- Regression Analysis Multiple Choice
- Detection of Heteroscadasticity
- Lec- ECN326 Heteroskedasticity-HO.pdf
- All-tests for Econometrics
- M23- Residuals & Minitab Handout
- THE PE TEST
- Algorithm and Code in R for LAD Estimator of the Linear Regression Models
- Lecture 10
- l25
- My Stata Command Details.pdf
- Zhao Zhang NN
- (3)Strategy-proof estimators for simple regression +.pdf
- cochrane.ppt
- MA Assignment 2.docx

You are on page 1of 8

mqwertyuiopasdfghjklzxcv

bnmqwertyuiopasdfghjklzx

cvbnmqwertyuiopasdfghjkl

Heteroscedasticity

zxcvbnmqwertyuiopasdfghj

klzxcvbnmqwertyuiopasdfg

hjklzxcvbnmqwertyuiopasd

fghjklzxcvbnmqwertyuiopa

sdfghjklzxcvbnmqwertyuio

pasdfghjklzxcvbnmqwertyu

iopasdfghjklzxcvbnmqwert

yuiopasdfghjklzxcvbnmqwe

rtyuiopasdfghjklzxcvbnmq

wertyuiopasdfghjklzxcvbn

mqwertyuiopasdfghjklzxcv

bnmqwertyuiopasdfghjklzx

Azra Mia, Sifiso Vumase, Sindiswa Majija,

TebogoDigoamaje

PROBLEM

The classical linear regression model assumption is that the variance of the error, is

constant, this is called Homoscedasticity. Homoscedasticity is when the variations

across the values neither decreases nor increases but is the same across the

values. Heteroscedasticity is when the variance of the error,

decreases as the value of the independent variable increases, a scatterplot of these two

variables will create a cone-like shape. Using an example of savings being the

dependent variable and income being the independent variable, the difference between

heteroscedasticity and homoscedasticity will be clear.

yi

i+ 2 i+ i

When income increases, savings on the average increases but with homoscedasticity

the variance of the savings stay the same at all levels of income, whereas with

heteroscedasticity it increases with income. Heteroscedasticity is used with cross

sectional data rather than time series data. In cross sectional data, members of a

population are focused on at a given point in time and in time series data one collects

data of the same kind for a period of years. Examples of this are Gross National

product, consumption expenditure savings, or employment in South Africa for a certain

period of years. OLS is a way of estimating a model and this is used in regression

analysis. OLS estimator states that when the assumption of homoscedasticity holds,

2

^

is therefore the best linear unbiased estimator. When we replace

homoscedasticity with the assumption of heteroscedasticity we establish that the

^2

unbiasedness of is not necessary that the error has to be homoscedastic.

The variances of the error play no part in the determination of the unbiased property.

^

2 is also a consistent estimator despite heteroscedasticity. It is not affected by

unequal variances. That is as the sample size increases indefinitely, the estimated

2 converges to its value . ^

2 Has the property of being consistent and unbiased

but its not efficient or best.

Its variance is not at its minimum in the class of unbiased estimators. Heteroscedasticity

focuses on the error term and not the two variables in the context of regression.

CAUSES OF HETEROSCEDASTICITY

As the meaning of heteroscedasticity has already been explored its important to note

the cause of it. There are numerous and they are mentioned below:

means of inaccurate or highly detailed responses from a survey or sample data

set, or even an error when entering the data.

Inconstant variances of the disturbances (error terms) may be caused by the

presence of outliers extreme values of the independent variables- and

skewness in the distribution of one or more of the regressors: i.e. values of the

independent variable that differ greatly from the other values within the model or

sample. For instance the presence of an extremely wealthy individual in a sample

of middle-income earners will distort the dispersion

The change variance could arise when taking into consideration too many

subpopulation differences. Therefore heteroscedasticity is highly likely in crosssectional data however its not impossible for it to be present in time series data.

When analyzing the data, there could be misspecifications, such as running the

data with Y instead of the log of Y; this would lead to a change in variance within

the model.

The omission of important variables also leads to heteroscedasticity being

present therefore if more statistically significant variables were added to the

model, the variance of the error term would remain constant.

var ( ui ) = 2

And the equation for a heteroscedastic variance:

var (ui)= 2i

The () indicates to us how the variance changes with each increase in sample

size, therefore presenting heteroscedasticity

earners vs low income earners. The high income earners have more disposable income

therefore they are more flexible with their consumption which creates more dispersion.

However a low income earner has less disposable income and would have little or no

options but to spend the income on consumption of basic necessities, therefore less

dispersion.

CONSEQUENCES OF HETEROSCEDASTICITY

into consideration the consequences.

Once heteroscedasticity is detected in a regression line, it violates the assumption that

variance should remain equal (homoscedastic) and to the minimum. Heteroscedasticity

leads to the regression estimators being no longer efficient nor the best as it does not

have a minimum variance anymore, therefore it can no longer be termed BLUE.

However, heteroscedasticity does not cause bias as the distribution remains on the

same mean over the homoscedastic normal distribution curve

As it can be seen from the graph, the normal distribution curves, share a mean of 4,

however the blue curve has a larger variance (standard deviation 2) compare to the red

curve.

Variance for a homoscedastic regression:

variance= 2

x2

x2 2

x2 2

variance=

The heteroscedastic variance equation underestimates the true variance and the

standard error of .

In conclusion, when using the usual testing methods such as, t-test, f-test and

hypothesis testing with heteroscedasticity present, then the conclusions we reach and

statements we make can be very misleading. This could lead us to concluding that the

explanatory variable X is statistically significant on Y, when it may actually have no

impact at all. The confidence intervals for will also be much narrower than what is

statistically accepted, which would lead to false conclusions.

Heteroscedasticity does not destroy the unbiasedness and consistency properties of the

ordinary least squares estimators, but they are no longer efficient and knowing these

consequences it is necessary to seek remedial measures. The lack of efficiency makes

the usual hypothesis-testing procedure invalid.

Sometimes heteroscedasticity results from improper model specification, there may be

subgroup difference, effect of variables may not be linear, or some important variables

have been left out of the model. These problems would have to be dealt with first. Do

not perform other techniques such as WLS, because they dont get to the heart of the

problem.

If 2 is known as the most straight forward method of correcting heteroscedasticity is by

means of weighted least squares to obtain BLUE estimators. The WLS estimator is the

OLS estimator applied to a transformed model that is obtained by multiplying each term

on both sides of the regression equation by a weight, denoted wt. For the above

example, the transformed model is

wtYt = wt1 + 2(wtXt2) + 3(wtXt3) + wtt

For the GLS estimator, the wt = 1/t. Thus, the GLS estimator is a particular kind of

WLS estimator. Thus, each observation on each variable is given a weight wt that is

inversely proportional to the standard deviation of the error for that observation. This

means that observations with a large error variance are given less weight, and

observations with a smaller error variance are given more weight in the GLS regression.

Down sides to GLS/WLS

The major problem with GLS estimator is that to use it you must know the true error

variance and standard deviation of the error for each observation in the sample.

However, the true error variance is always unknown and unobservable. Thus, the GLS

estimator is not a feasible estimator.

2 is not always known and when not known another method should be used which is

the Feasible Generalized Least Squares. To make the GLS estimator feasible, we can

use the sample data to obtain an estimate of t for each observation in the sample. We

can then apply the GLS estimator using the estimates of t. When we do this, we have

a different estimator. This estimator is called the Feasible Generalized Least Squares

Estimator.

Example:

Yt = 1 + 2Xt2 + 3Xt3 + t

for t = 1, 2, , n

for t = 1, 2, , n

The rest of the assumptions are the same as the classical linear regression model.

Suppose that we assume that the error variance is a linear function of X t2 and Xt3. Thus,

we are assuming that the heteroscedasticity has the following structure.

for t = 1, 2, , n

For this to work you would need to Regress Yt against a constant, Xt2, and Xt3, then

calculate, Square these residuals. Use the estimates of 1, 2, and 3 to calculate the

predicted values t2. This is an estimate of the error variance for each observation.

Check the predicted values. For any predicted value that is non-positive replace it with

the squared residual for that observation. This ensures that the estimate of the variance

is a positive number (you cant have a negative variance). Lastly Multiply Y t, Xt2, and

Xt3 for each observation by its weight and Regress wtYt on wt, wtXt2, and wtXt3 using

OLS, and after this you would

Obtain FGLS estimates of the parameters 1, 2, and.

The question as to which remedial measure will work depends fully on the problem and

the severity of the heteroscedasticity.

- Manfred Gartner Et Bjorn Griesbach 2012_rating Agencies, Self-fulfilling Prophecy and Multiple EquilibriaUploaded byluiz carvalho
- An AnalysisUploaded bynsrivastav1
- Econometric sUploaded bytafakharhasnain
- Frm Aim Statements 2014-WebUploaded byVivek Singh
- Data Regresi Suhu DinginUploaded byAndre Amin Hidayat
- Econ Assignment 3 1a eUploaded byPhil Deen
- Regression Analysis Multiple ChoiceUploaded byAugust Mshingie
- Detection of HeteroscadasticityUploaded byIshanDogra
- Lec- ECN326 Heteroskedasticity-HO.pdfUploaded byrui
- All-tests for EconometricsUploaded byjovanamarceta89
- M23- Residuals & Minitab HandoutUploaded bychintyawidya
- THE PE TESTUploaded byrcret
- Algorithm and Code in R for LAD Estimator of the Linear Regression ModelsUploaded bynadamau22633
- Lecture 10Uploaded byAmera Najem
- l25Uploaded bykegnata
- My Stata Command Details.pdfUploaded bytaposh
- Zhao Zhang NNUploaded byOsman Gani
- (3)Strategy-proof estimators for simple regression +.pdfUploaded byFathirGangguanJiwa
- cochrane.pptUploaded byMounica Toleti
- MA Assignment 2.docxUploaded bysumit sharma
- L2 RegressionUploaded bycuachanhdong
- A statistical regression analysis exampleUploaded byMurad Yadigar
- 255185Uploaded byangeljosechuquiure
- How ThesisUploaded bykmillat
- MFIMET2 EXAMUploaded byDaniel Hofilena
- LAtihan SPSSUploaded byBudi ABank Tarigan
- fplrp17Uploaded byMarciel Souza Carvalho
- StatUploaded byMohit Verma
- Econometrics I 2Uploaded bymasabkhan
- dpcgbcr30Uploaded byRabia Kausar

- A Meta-Analytic Review of Effectuation and Venture PerformanceUploaded byNdivhuho Neosta
- CaseUploaded byNdivhuho Neosta
- Stock ValuationUploaded byNdivhuho Neosta
- IRRvsTWRRUploaded byAmol Chavan
- RE InvesmentsUploaded byNdivhuho Neosta
- Regression Explained SPSSUploaded byKashif Munir Idreesi
- Econometric sUploaded byNdivhuho Neosta
- Black Economic Power and Nation Building in Post Apartheid South AfricaUploaded byNdivhuho Neosta
- Entrepreneurial Expertise and the Use of ControlUploaded byNdivhuho Neosta
- Dew - Effectual Versus Predictive Logics in Entrepreneur_3Uploaded byNdivhuho Neosta
- Case Study Risk Analysis and Real Options in Real Estate DevelopmentUploaded byNdivhuho Neosta
- Chandler et al_Causation and effectuation processes.pdfUploaded byNdivhuho Neosta
- TFIP Fund ListUploaded byNdivhuho Neosta
- Irrational+ExuberanceUploaded bytrendscatcher
- BankingUploaded byjayashree_jothivel
- Lect 12 RealestateUploaded byNdivhuho Neosta
- Cash Flow WaterfallUploaded byNdivhuho Neosta
- statsUploaded byNdivhuho Neosta
- AnalysisUploaded byNdivhuho Neosta
- StatisticsUploaded byNdivhuho Neosta
- Sample ContractUploaded byNdivhuho Neosta
- Caso 1Uploaded byPlanifica Tus Finanzas
- Investmentl.docUploaded byNdivhuho Neosta
- ModelAnalysisUploaded byNdivhuho Neosta
- business_plan_presentation_format.pptUploaded byFahad Sarfraz
- WorkbookTemplateUploaded byNdivhuho Neosta
- Week 7 NotesUploaded byNdivhuho Neosta
- class4Uploaded byNdivhuho Neosta
- class2Uploaded byNdivhuho Neosta

- RE18136-Uploaded byAhmed Abd Elhakeem
- FLA 01 - Journal Review - Instructional LeadershipUploaded byAbi Calimbahin
- Well Test Desing and AnalysisUploaded byMuhammad Ali Buriro
- Vibrating Sample MagnetometerUploaded byAreef Billah
- accb1MMS 403Uploaded byAbhishek_mhptr
- Vershire Company Case PrintUploaded byFahmi A. Mubarok
- 1003000270 (1).pdfUploaded byShiv Prasad
- Specification 705 - Optic Fibre Installations.RCN-D14^23409264Uploaded byDerrick Senyo
- Process Engineering GuideUploaded byyinkaakins2001
- spsscat.pdfUploaded byArturo Rebolledo Ramírez
- i b 2514451452Uploaded byAnonymous 7VPPkWS8O
- 3212AUploaded byGustavo Taquichiri
- Meteor Burst Communications- article on commercial history, developments, key international projects- Don Sytsma interviewUploaded bySkybridge Spectrum Foundation
- Shipping ExecutionUploaded byMohamed Salah El Din
- MB00050Uploaded byHabeeb Rahman Velikakath
- PURSUIT Newsletter No. 69, First Quarter 1985 - Ivan T. SandersonUploaded byufortean
- Leave Register format.Uploaded byMukeshJoshi
- 7-90107V3_PW_4.1_SP1_User_Guide_August_14_2013Uploaded byDavid García Márquez
- Important SAP MM Tcodes 1Uploaded byroshan_kr
- Program Final WebUploaded bypoonam_ranee3934
- Cristie Software -TBMR Presentation - EndUserUploaded byVishumule Mule
- CFMS DocumentationUploaded byFelix Nana Sarpong
- Fuel Flow MetersUploaded byAMIYA SHANKAR PANDA
- Tema ArsitekturUploaded byJoseph Hughes
- Time and Space Complexity ImprovementsUploaded byravigobi
- ICT SponsorshipUploaded byOanh Nguyen
- PMO Charter Template with ExampleUploaded byMegan Wale
- Ph.d Thesis Iupware by LiuyongboUploaded byWayaya2009
- Improve Energy Efficiency of Electrical System by Energy Audit (Data Logging)Uploaded byIAEME Publication
- Competency Demonstration Report,ReviewMyCDRUploaded byMark Peter