Consider the following statement: "Omitting an important explanatory variable can cause the usual OLS t statistics...
Consider the following statement: "Omitting an important explanatory variable can cause the usual OLS t statistics to be invalid" Is this statement true or false?
True or False?
Homework Answers
Answer: True
Omitting an explanatory variable causes the usual OLS t statistics to be invalid. This process is called Heteroskedasticity. It refers to the situation where the changeability of a variable is inconsistent over the scope of estimations of a second factor that predicts it.
A scatterplot of these factors will regularly make a cone-like shape, as they dissipate (or inconstancy) of the reliant variable (DV) enlarges or limits as the estimation of the free factor (IV) increments.
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