8-8 Heteroscedasticity revisited An example of a structural model is V=B1+ A2x2t+ B3x3t+ B4x4t+ur with u, n(o, ox). The assumption that the variance of the errors is constant is known as homoscedasticity, i. e Var(u=o What if the variance of the errors is not constant heteroscedasticity would imply that standard error estimates could be wrong. Is the variance of the errors likely to be constant over time? not for financial data8-8 Heteroscedasticity Revisited • An example of a structural model is with ut  N(0, ). The assumption that the variance of the errors is constant is known as homoscedasticity, i.e. Var (ut ) = . • What if the variance of the errors is not constant? - heteroscedasticity - would imply that standard error estimates could be wrong. • Is the variance of the errors likely to be constant over time? Not for financial data.  u 2  u 2 yt = 1 + 2 x 2t + 3 x 3t + 4 x 4t + u t