Question #55

Smith's Concern 1 is incorrect. Heteroskedasticity is a violation of a regression assumption, and refers to regression error variance that is not constant over all observations in the regression. Conditional heteroskedasticity is a case in which the error variance is related to the magnitudes of the independent variables (the error variance is "conditional" on the independent variables). The consequence of conditional heteroskedasticity is that the standard errors will be too low, which, in turn, causes the t- statistics to be too high. Smith's Concern 2 also is not correct. Multicollinearity refers to independent variables that are correlated with each other. Multicollinearity causes standard errors for the regression coefficients to be too high, which, in turn, causes the t- statistics to be too low. However, contrary to Smith's concern, multicollinearity has no effect on the F-statistic.