Unit Overview
Unit 5 examines what happens if one of the assumptions of the classical linear regression model is not met, when the disturbance terms are heteroscedastic – that is, when the variance of the disturbance terms is not constant.
Learning outcomes
After studying Unit 5, the associated readings, and completing the exercises, you will be able to:
• explain what is meant by heteroscedasticity
• discuss the consequences of heteroscedasticity for OLS estimators and inference based on them
• use graphs to identify heteroscedasticity
• use auxiliary regressions to test for heteroscedasticity
• use weighted least squares to estimate models where heteroscedasticity is present
• transform equations to eliminate heteroscedasticity
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