This test, and an estimator for heteroskedasticity-consistent standard errors, were proposed by Halbert White in 1980. These methods have become extremely widely used, making this paper one of the most cited articles in economics.
In cases where the White test statistic is statistically significant, heteroskedasticity may not necessarily be the cause; instead the problem could be a specification error. In other words, the White test can be a test of heteroskedasticity or specification error or both. If no cross product terms are introduced in the White test procedure, then this is a pure test of pure heteroskedasticity. If cross products are introduced in the model, then it is a test of both heteroskedasticity and specification bias.
Testing constant variance
To test for constant variance one undertakes an auxiliary regression analysis: this regresses the squared residuals from the original regression model onto a set of regressors that contain the original regressors along with their squares and cross-products. One then inspects the R2. The Lagrange multiplier (LM) test statistic is the product of the R2 value and sample size:
This follows a chi-squared distribution, with degrees of freedom equal to P-1, where P is the number of estimated parameters (in the auxiliary regression).
The logic of the test is as follows. First, the squared residuals from the original model serve as a proxy for the variance of the error term at each observation. (The error term is assumed to have a mean of zero, and the variance of a zero-mean random variable is just the expectation of its square.) The independent variables in the auxiliary regression account for the possibility that the error variance depends on the values of the original regressors in some way (linear or quadratic). If the error term in the original model is in fact homoskedastic (has a constant variance) then the coefficients in the auxiliary regression (besides the constant) should be statistically indistinguishable from zero and the R2 should be “small". Conversely, a “large" R2 (scaled by the sample size so that it follows the chi-squared distribution) counts against the hypothesis of homoskedasticity.
If homoskedasticity is rejected one can use heteroskedasticity-consistent standard errors.
- White, H. (1980). "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity". Econometrica 48 (4): 817–838. JSTOR 1912934. MR 575027.
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- Waldman, Donald M. (1983). "A note on algebraic equivalence of White's test and a variation of the Godfrey/Breusch-Pagan test for heteroscedasticity". Economics Letters 13 (2–3): 197. doi:10.1016/0165-1765(83)90085-X.
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