Professional Documents
Culture Documents
Tutorial 5 - Heteroscedasticity
2
1. Consider the model Yi X i u i , Var (u i ) i , i 1, 2,..., n
[1]
*
Let be the ordinary least square estimator of and let be the weighted least
square estimator of .
a) State the formulas for and * and derive their variances, being careful to state any
assumptions that you use. Explain which has the largest variance algebraic demonstration
is not required)
Now Suppose that i 0 X i
b) State the formula for * and show that Var( * ) =
02
. Explain why this formula is
n
xt ,
Find the GLS estimator for 1 and 2 . How do these compare to the OLS estimators of
1 and 2 .
4. Consider the following regression model
y t 1 2 xt t , where E ( t ) 0, t Var ( t ) 2 / xt2 t
Find the GLS estimator for 1 and 2 . How do these compare to the OLS estimators of
1 and 2 .
5. Consider the following equation to be estimated with cross-section data Yi X i i
w
where the regressor Xi is deterministic, E ( i ) 0 for all i, Var ( i ) e i for certain
20 Elements of Econometrics
153
University of London
(a) Show that the OLS estimator of in the model above is unbiased and calculate its
variance.
(b) Explain the consequences of Heteroscedasticity for the properties of OLS estimators.
(c) Explain how, after estimating the equation by OLS, you would investigate for the
presence of Heteroscedasticity.
(d) Assuming is known, propose an alternative method of estimating and state in
which sense this model could be an improvement over OLS estimation.
6. Let a model be
Yt 0 1 X t1 2 X t 2 u t ; t 1,2,...., T , E (u t ) 0 for all t.
2
A researcher suspects that the variance of the disturbance term is V u t X t1
(a) Explain how the researcher should proceed to test the null hypothesis
H 0 : V (u t ) 2
against
the
alternative
hypothesis
2
H 1 : V (u t ) X t1 for all t 1,2,...T .
(b) If the researchers suspicion is correct then how will it affect the properties of the
ordinary least square estimators?
(c) Suggest, in detail, an estimation procedure which will give best linear unbiased
estimates of the parameters.
20 Elements of Econometrics
154