This volume covers the commonly ignored topic of heteroskedasticity (unequal error variances) in regression analyses and provides a practical guide for how to proceed in terms of testing and correction. Emphasizing how to apply diagnostic tests and corrections for heteroskedasticity in actual data analyses, the book offers three approaches for dealing with heteroskedasticity:

variance-stabilizing transformations of the dependent variable; calculating robust standard errors, or heteroskedasticity-consistent standard errors; and; generalized least squares estimation coefficients and standard errors.

The detection and correction of heteroskedasticity is illustrated with three examples that vary in terms of sample size and the types of units analyzed (individuals, households, U.S. states). Intended as a supplementary text for graduate-level courses and a primer for quantitative researchers, the book fills the gap between the limited coverage of heteroskedasticity provided in applied regression textbooks and the more theoretical statistical treatment in advanced econometrics textbooks.

Choosing among Correction Options

The first thing to keep in mind is that ignoring heteroskedasticity can be consequential because it affects the significance tests of the OLS coefficients as the application examples demonstrated. In the presence of heteroskedasticity, OLS standard errors are biased and inconsistent in an unknown direction unless some form of correction for heteroskedasticity is undertaken. Some standard errors may be too large, and some may be too small. Thus, I strongly endorse Long and Ervin's (2000) recommendation to avoid using uncorrected OLS results if you suspect heteroskedasticity. In this monograph, I have described three options for taking heteroskedasticity into account: (1) VST of the outcome, which may reduce or eliminate heteroskedasticity; (2) HCCMs, which estimate corrected OLS standard errors without having to ...

  • Loading...
locked icon

Sign in to access this content

Get a 30 day FREE TRIAL

  • Watch videos from a variety of sources bringing classroom topics to life
  • Read modern, diverse business cases
  • Explore hundreds of books and reference titles