Interview Question: Misbehaving Error Term

Sample Question #186 (econometrics)

What implications does heteroskedasticity have for OLS estimates? What about serial correlation?

(Comment: everyone who’s studied econometrics should know the answer)

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One Response to Interview Question: Misbehaving Error Term

  1. Brett says:

    ANSWER
     
    Heteroskedasticity underreports the sample variance of the OLS estimator, thus inflating t-scores making potentially statistically insignificant parameter estimates look significant. Heteroskedasticity does not affect the unbiasedness of the OLS estimator.
     
    Serial correlation has the same effect.
     

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