Introductory Econometrics: A Modern Approach 6th Edition by Jeffrey M Wooldridge

Exercise 3

(i) Use the data in HPRICE1.RAW to obtain the heteroskedasticity-robust standard errors for equation. Discuss any important differences with the usual standard errors.

(ii) Repeat part (i) for equation.

(iii) What does this example suggest about heteroskedasticity and the transformation used for the dependent variable?

Equation

Equation

Step 1 of 5

(i)

Estimating the model where is regressed on such that the standard error of the coefficients ofare heteroskedasticity-robust standard error, the result is as follows:

Estimate the model where is regressed on such that the standard error of coefficients of are the usual OLS standard error, the result is as follows:

On comparing the usual OLS standard error with the heteroscedasticity-robust standard error, the result is as follows:

It shall be noted that the heteroscedasticity-robust standard error for the coefficient of is 0.001251 whereas, the usual standard error is 0.000642. With usual standard error, the coefficient of is significant with p-value 0.0018 whereas with heteroscedasticity-robust standard error, the coefficient of is insignificant at 5% level of significance

While the coefficient of is with usual standard error of 0.013237, it is with heteroscedasticity-robust standard error of 0.017725

Similarly, the usual OLS standard error of the coefficient of is 9.010145 which is higher than the heteroscedasticity-robust standard error at 8.478625