What is Heteroskedasticity o Recall the assumption of homoskedasticity implied that conditional on the explanatory variables the variance of the unobserved error u was constant o If this is not true that is if the variance of u is different for different values of the x's then the errors are heteroskedastic Example: estimating returns to education and ability is unobservable, and think the variance in ability differs by educational attainment Economics 20- Prof andersonEconomics 20 - Prof. Anderson 2 What is Heteroskedasticity Recall the assumption of homoskedasticity implied that conditional on the explanatory variables, the variance of the unobserved error, u, was constant If this is not true, that is if the variance of u is different for different values of the x’s, then the errors are heteroskedastic Example: estimating returns to education and ability is unobservable, and think the variance in ability differs by educational attainment