True or False? explain answer please. Estimating an equation using the OLS metho

Question

Explanation / Answer

True.

Heteroscedasticity (the violation of homoscedasticity) is present when the size of the error term differs across values of an independent variable (x).

Recall that ordinary least-squares (OLS) regression seeks to minimize residuals and in turn produce the smallest possible standard errors. By definition, OLS regression gives equal weight to all observations, but when heteroscedasticity is present, the cases with larger disturbances have more “pull” than other observations.

Examining a scatterplot of the residuals against the predicted values of the dependent variable would show a classic cone-shaped pattern of heteroscedasticity (which means variance of y/x is increasing or decreasing function of x).

Therefore, in this case OLS does not allow us determine a clear picture of the effect of x on y and we use weighted least square method, as it down-weights those observations with larger disturbances.

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.