Question #120
Reading: Reading 1 Multiple Regression
PDF File: Reading 1 Multiple Regression.pdf
Page: 58
Status: Unattempted
Correct Answer: B
Question
Which of the following statements regarding heteroskedasticity is least accurate?
Answer Choices:
A. When not related to independent variables, heteroskedasticity does not pose any major problems with the regression
B. Heteroskedasticity only occurs in cross-sectional regressions
Explanation
If there are shifting regimes in a time-series (e.g., change in regulation, economic
environment), it is possible to have heteroskedasticity in a time-series. Unconditional
heteroskedasticity occurs when the heteroskedasticity is not related to the level of the
independent variables. Unconditional heteroskedasticity causes no major problems with
the regression. Breusch-Pagan statistic has a chi-square distribution and can be used to
detect conditional heteroskedasticity.
(Module 1.3, LOS 1.h)
Binod Salve, CFA, is investigating the application of the Fama-French three-factor model
(Model 1) for the Indian stock market for the period 2001–2011 (120 months). Using the
dependent variable as annualized return (%), the results of the analysis are shown in Indian
Equities—Fama-French Model
Indian Equities—Fama-French Model
Factor
Coefficient P-Value VIF
Intercept
1.22
<0.001
SMB
0.23
<0.001
3
HML
0.34
0.003
3
Rm-Rf
0.88
<0.001
2
R-squared
0.36
SSE
38.00
BG (lag 1)
2.11
BG (lag 2)
1.67
Partial F-Table (5% Level of Significance)
Degrees of Freedom Denominator
Degrees of Freedom Numerator
1
2
3
112
3.93
3.08
2.69
113
3.93
3.08
2.68
114
3.92
3.08
2.68
115
3.92
3.08
2.68
116
3.92
3.07
2.68
117
3.92
3.07
2.68
Partial Chi-Square Table (5% Level of Significance)
Degrees of Freedom Critical Value
1
3.84
2
5.99
3
7.81
4
9.49
5
11.07
6
12.59