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Re: RE : Heteroskedasticity and fixed effects (was: st: RE: Re: Weak instruments)
At 07:22 AM 7/17/2008, Maarten buis wrote:
A final note, though you will probably already know it as it is (or
should be) in any intro stats book: Do not test for heteroskedasticity
before you have looked at the functional form of the effects of your
predictors.
I might have a slightly different take: If a test for hetero comes up
positive, don't just assume that means that you should use wls or
robust standard errors or whatever. Other problems in model
specification could be affecting your hetero test, e.g. you need to
include interaction terms or squared terms or whatever. The advice
you sometimes hear that hetero isn't that big of a deal is a bit
misleading, I think, because hetero may be a byproduct of other
problems in model specification.
Anyway, one way or another, your goal is to get the right functional
form, and a positive hetero test may indicate that you haven't
achieved that yet.
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Richard Williams, Notre Dame Dept of Sociology
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