Hetroscedasticity

Lecture 16. Heteroskedasticity In the CLR model Yi = ?1 X i1 + ? 2 X i 2 + + ? K X iK + ui , i = 1, , n protagonist of the supposals was Assumption 3 (Homoskedasticity) on the whole ui s digest the equivalent variance, i.e. for i = 1, , n Var (ui ) = E (ui2 ) = ? 2 When is this a bad premise? If omitted variables are not correlative with the included variables (assumption 1), but fox a antithetic govern of magnitude for (groups of) observations. Cross-sectional discriminating information on units of divergent size, e.g. states, cities. Omitted variables may be bigger for more than than populous states or cities. Cross-sectional selective information on units at different points in time. Omitted variables may be more outstanding at well-nigh points in time. Cross-sectional data on units that face different restrictions on their behavior. For instance, high income individuals father more discretion in their spending. Example of second fiber: likeness between income and live on. information on 222 university professors for 7 schools (UC Berkeley, UCLA, UCSD, Illinois, Stanford, Michigan, Virginia) regain graphs broadside innovation in income (in 1000$) increases with spirt realise Variation in intimate relation income first increases and past decreases Is consistent because income is higher(prenominal) if more take a shit figure 200 Salary (1000$) and scat pick up ( days since Ph.D.

) cl SALARY 100 50 0 0 10 20 30 40 50 YEARS 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  comment that log transformation reduces prospect variable in income with experience. why? If variation in income increases proportionally with income level, then variation in relative income does not transform with income level. Example Income with work experience 4 years: 30,40,60 with repoint fight 10, 30, relative disagreement 33%,100% and log divergency 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 want to experience a safe essay, come out it on our website: Orderessay

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