Introduction to Heteroscedasticity and How to Correct It in Stata Using White’s Robust Standard Errors

In this video, Dr. Ngozi ADEYELE, PhD, Founder Crunch Econometrix, discusses heteroscedasticity and how to correct it in Stata using White’s robust standard errors.

Heteroscedasticity is a statistical problem that occurs when the variance of the residuals (the errors between the actual values and the values predicted by a model) is not constant. This can lead to biased and inefficient estimates of the model’s parameters.

The video starts with an introduction to heteroscedasticity. The speaker then explains how to detect heteroscedasticity using the Breusch-Pagan test. Once heteroscedasticity is detected, the speaker explains how to correct it using White’s robust standard errors.

White’s robust standard errors are a method of estimating the standard errors of the model’s parameters that are robust to heteroscedasticity. This means that the standard errors will be correct even if the residuals are not homoscedastic.

The speaker then demonstrates how to use White’s robust standard errors in Stata. He uses the vce(robust) option in the regress command to estimate the standard errors.

The speaker concludes the video by summarizing the key points. He emphasizes that heteroscedasticity is a common problem that can lead to biased and inefficient estimates of the model’s parameters. He also emphasizes that White’s robust standard errors are a simple and effective way to correct for heteroscedasticity.

Here are some additional points from the video:

• The speaker recommends using the estat het command in Stata to test for heteroscedasticity.
• The speaker recommends using the robust option in the regress command to estimate White’s robust standard errors.
• The speaker notes that White’s robust standard errors are not always the best way to correct for heteroscedasticity. In some cases, it may be better to use generalized least squares (GLS) or weighted least squares (WLS).

I hope this article is helpful!

Credit: To Dr. Ngozi ADEYELE, PhD. Founder Crunch Econometrix