Regression Analysis and Assumption Violations

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Heteroskedasticity

There are two types, Conditional and Unconditional.  The type focused on in evaluating model validity is Conditional Heteroskedasticity.

  • Conditional = the error terms change in a systematic manner that is correlated with the values of the independent variables.

  • Look up a graph depicting this problem.

  • The Breusch-Pagan test will test for Conditional Heteroskedasticity.

  • When this problem is present, the model’s t-scores will be artificially high, indicating a false significance of relationships.

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