Hetroscedasticity

Lecture 16. Heteroskedasticity In the CLR model Yi = ?1 X i1 + ? 2 X i 2 + + ? K X iK + ui , i = 1, , n hotshot of the supposals was Assumption 3 (Homoskedasticity) All ui s digest the equivalent variance, i.e. for i = 1, , n Var (ui ) = E (ui2 ) = ? 2 When is this a bad assumption? If omitted variables are non correlated with the included variables (assumption 1), but have a opposite order of magnitude for (groups of) observations. Cross-sectional selective information on units of unalike size, e.g. states, cities. Omitted variables may be larger for more than than inhabited states or cities. Cross-sectional data on units at different points in time. Omitted variables may be more outstanding at some points in time. Cross-sectional data on units that looking different restrictions on their behavior. For instance, high income individuals have more discreetness in their spending. Example of second case: likeness surrounded by income and welcome. Data on 222 university professors for 7 schools (UC Berkeley, UCLA, UCSD, Illinois, Stanford, Michigan, Virginia) See graphs broadside innovation in income (in 1000$) increases with spirt experience Variation in sexual relation income first increases and then decreases Is consistent because income is higher(prenominal) if more work experience 200 Salary (1000$) and work experience ( age since Ph.D.

) cl SALARY 100 50 0 0 10 20 30 40 50 eld 5.5 Log(Salary) and work experience (years since Ph.D.) 5.0 LNSALARY 4.5 4.0 3.5 0 10 20 30 40 50 YEARS Note that log transformation r educes chance variable in income with exper! ience. Why? If variation in income increases proportionally with income level, then variation in relative income does not change with income level. Example Income with work experience 4 years: 30,40,60 with direct difference 10, 30, relative difference 33%,100% and log difference 0.29, 0.69 (all relative to lowest) Income at work experience 8 years: 90,120, 180 with absolute difference 30, 90, relative difference...If you call for to get a safe essay, order it on our website: BestEssayCheap.com

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