Chapter 8

Variance Heterogeneity

The Panel Data Case

If we remember from Chapter 3, variance heterogeneity can rarely be detected with a test for homoskedasticity. To reiterate equation (3.5) from that chapter, we have

r 2 = c0 + c1D + m, (8.1)

which tells us that in the case of variance heterogeneity, a correlation would exist between the squared residuals and a set of dummy variables representing a particular clustering of the data, much like in intercept and slope heterogeneity. However, we run into an issue if we perform a regression specified exactly like (8.1). That is because the dependent variable is a squared version of a normally distributed variable (at least we hope it’s normally distributed). Park (1966) recommended using the natural ...

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