Heteroskedasticity

CFA Level II Quant
#1

How would there be heteroskedasticity when the t-test is greater thant the critical value?

Exhibit 5.

EXHIBIT 5

UNIT ROOT TEST FOR NONSTATIONARITY AND THE TEST FOR HETEROSKEDASTICITY

Unit root test statistic −18.7402 Unit root test critical value at the 5% level of significance −2.89 Heteroskedasticity test statistic 2.016733 Heteroskedasticity test critical value at the 5% level of significance 1.96

Q. Based on the results reported in Exhibit 5, the AR(1) model is best described as having:

  1. a unit root.
  2. heteroskedasticity in the error term variance.
  3. reliable standard errors.
#2

The test for heter… is 2.016 while the critical value is 1.96.

2.016 > 1.96, therefore you reject the null hypoth and conclude that there is hetero…

#3

but should not it be that when I reject the null hypothesis the model would be homoskedastic?

#4

Your null hypothesis test is H0: no Heteroskedactisty so with your t value oof 2.016 which is higher than the 1.96 critical value you got a significant test here and reject that there is no Heterskedacitisty and conclude its existence.

#5

Fundamental concepts of null hypothesis that should stick from L1.

The H0 is the opposite of what you’re trying to test. If you want to test if there is Heterskedacitisty , then the null is no Heterskedacitisty