Lecture 13Heteroskedasticity.ppt

Lecture 13Heteroskedasticity (Chapter 10.1–10.4, 10.7) Agenda for Today Review Standard Errors (Chapter 5.2) Heteroskedasticity (Chapter 10.1) OLS and Heteroskedasticity (Chapter 10.2) Tests for Heteroskedasticity (Chapter 10.3) Generalized Least Squares (Chapter 10.4) GLS: an Example (Chapter 10.5) Review of Standard Errors (Chapter 5.2) Our DGP describes an underlying process we wish to study. The model includes a stochastic component, the error term. There are many possible realizations of the error term, but we get to observe only one. The underlying process plus the particular realization of the error term?our sample. Review of Standard Errors (cont.) We observe only one sample. Our estimator (OLS) provides a rule for going from one sample to one best guess of the underlying parameters. If we could observe many samples, we could estimate many best guesses. If we could observe many samples, we would have a distribution of estimates. Review of Standard Errors (cont.) Using our model and our sample, we can estimate NOT ONLY the underlying parameters BUT ALSO the cross-sample distribution of our estimates. Estimating the cross-sample distribution lets us judge how likely our best guess is to be close to the real underlying parameters. Review of Standard Errors (cont.) Review of Standard Errors (cont.) Review of Standard Errors (cont.) To derive the variance of a linear estimator, we need to add the two assumptions about the variance and covariances of the error term: Review of Standard Errors (cont.) Review of Standard Errors (cont.) Review of Standard Errors (cont.) Review of Standard Errors (cont.) Problem: we do not know s 2 Solution: estimate s 2 We do not observe the ACTUAL error terms, ei We DO observe the residual, ei Review of Standard Errors (cont.) We can estimate the STANDARD ERROR of our OLS estimator (the cross-sample standard deviation). Review of Standard Errors (cont.) Estimated standard errors are used to calculate t-statistics, used for testing