Question

How does heteroskedasticity affect the theoretical properties of the OLS estimator?

How does heteroskedasticity affect the theoretical properties of the OLS estimator?

Homework Answers

Answer #1

Consequences of heteroskedasticity

1) OLS estimators are still unbiased & linear. But they are no longer BLUE, in both small & large samples .

Estimators don't have minimum variance & hence they are no longer efficient.

2) usual formulas of variance of OLS estimators are biased.& Overestimate true variance & standard deviation

3) this leads to inefficient forecasting.

Usual confidence intervals & hypothesis tests based on t& F distribution are unreliable, leads to wrong conclusions.confidence intervals are likely to be larger.

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