Heteroscedasticity

Jamie Monogan
University of Georgia

Intermediate Political Methodology

Jamie Monogan (UGA)

Heteroscedasticity

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Objectives

By the end of this meeting, participants should be able to:

Define heteroscedasticity and describe the problems it produces.
Identify when heteroscedasticity is present in real data analysis
Use robust standard errors or feasible GLS to correct for
heteroscedasticity.

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What is Heteroscedasticity?
AKA Heteroskedasticity

The weak set of Gauss-Markov assumptions assumes the variance of

the disturbances is homoscedastic: Var (ui ) = 2 .
A violation of this assumption means that the variance is not
constant for all disturbances. We call this heteroscedastic error
variance: Var (ui ) = i2 .
Why might this occur? Perhaps at higher values of outcome Y there
is greater unexplained variation. Perhaps we have less certainty about
individuals having certain input values X .
are still unbiased. They are no
The consequence: OLS estimates
longer efficient, however.

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The Problem of Heteroscedasticity: A Visualization

Homoscedasticity

Source:

Heteroscedasticity

Gujarati & Porter 2009, Figures 11.1 & 11.2 (p.

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Exchange Rates: Marks to Pounds by Day

A Real Example of Heteroscedasticity

Citations:
Greene, William H. 2003. Econometric Analysis. 5th ed. Upper
Saddle River, NJ: Prentice Hall. (p.239)
Bollerslev, T. 1986. Generalized Autoregressive Conditional
Heteroscedasticity. Journal of Econometrics 31:307-327.
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Modeling Swiss Government Employment

A Real Example of Heteroscedasticity

FWLS
OLS
Input
Estimate SE Estimate SE
GDP
0.14 0.74
0.07 1.13
PR
-1.95 0.46
-1.47 2.15
26.14 2.40
24.46 12.74
Intercept
Notes: N=26, Breusch-Pagan test on OLS residuals 5.68 (p = .02).
Citations:
Leeman, Lucas & Jeff Gill. 2011. Weighted Least Squares. In
International Encyclopedia of Political Science. Bertrand Badie, Dirk
Berg-Schlosser & Leonardo Morlino, eds. Thousand Oaks: Sage.
Vatter, A., M. Freitag, C. M
uller & M. B
uhlmann. 2004. Political,
Social, and Economic Data of the Swiss Cantons 1983-2002. Bern:
University of Bern.
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Identifying Heteroscedasticity
Visual Diagnosis
Plotting residuals (
u ) against:
fitted values (Y ).
farious predictors (X ).

Plotting squared residuals.

Hypothesis Tests
Park test
Glejser test
Spearmans rank correlation test
Goldfeld-Quandt test
Breusch-Pagan(-Godfrey) test

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Breusch-Pagan-Godfrey Test
H0 : homoscedasticity, HA : heteroscedasticity. Test with a 5 step process.
1

Estimate your regression model with OLS. Save the residuals

(
u1 , u2 , . . . , un ).
Calculate
P the ML estimate of the error variance of regression:

2 = ui2 /n.
Create a new variable by dividing the squared residuals by the error
variance: pi = ui2 /
2.
Regress pi as a function of all variables, Z that may account for
heteroscedasticity. (Note: It may be that {Z } = {X }.)
pi = 1 + 2 Z2i + + m Zmi + i

Calculate the explained sum of squares from the step four regression.
Then compute the test statistic for testing the hypothesis:
1
= ESS 2m1
2
Jamie Monogan (UGA)

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Responding to Heteroscedasticity
Huber-White standard errors. (Note: Huber 1976 & White 1980.)
OLS estimates of parameters are unbiased.
OLS estimates of the variance-covariance matrix of coefficients are
inconsistent under heteroscedasticity.
The Huber-White sandwich estimator is, however, consistent.
(AKA robust standard errors.)

Weighted Least Squares

A special case of Generalized Least Squares with no autocorrelation.
= (X0 1 X)1 X0 1 y
GLS estimator:
We dont know , though, so we turn to feasible Generalized Least
b
Squares (fGLS) and substitute .

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Feasible Weighted Least Squares

Model the squared residuals with whatever you think explains

variance: u
2 = Z + .
Again, it may be that {Z } = {X }.
Save the predicted values. Call them wi .
b as the diagonal n n matrix with wi as the ii element.
Form
Inverting this is easy. Just take the reciprocal of every element:
1

w1 0 0
0 1 0
1
w

b
= . .2 .
..
.
.
.
. .
. .
0 0 w1n

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For Next Time

Read Gujarati & Porter Chapter 12.
Study the 2010 election data from Monogans Dataverse.
Describe a population regression function in which Republican share
of the two party vote (cRepTwo) is a function of multiple predictors.
Be ready to defend your choices.
Estimate the regression model implied by your population regression
model. Report these results in a neatly-formatted table.
Evaluate whether there is heteroscedasticity in the residuals. Use a
visual diagnostic and a test statistic. If these are at odds, which side
do you fall down on?
Regardless of your conclusion, show me that you can conduct a
remedial measure for heteroscedasticity. Report the results with
Huber-White robust standard errors, or the results from Weighted
Least Squares.
Papers: Have you obtained your data? Computed descriptive
statistics? Estimated your model using OLS?
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