Question

In the presence of changing variability, the estimated standard errors of the OLS estimators are inappropriate. What does this imply about using standard testing?

A. We should use F tests only
B. Standard t or F tests are not valid as they are based on these estimated standard errors.
C. Use standard t or F tests
D. We should use standard t tests only

Answer 1

When the estimated standard errors are inappropriate due to changing variability, standard t or F tests are not valid. Alternative methods that accommodate changing variance should be used for hypothesis testing.

Step-by-step explanation:

In the presence of changing variability, the estimated standard errors of the OLS estimators are indeed inappropriate. This implies that standard t or F tests, which rely on these standard errors, are not valid. These tests assume that the standard errors are accurate, but with changing variability, this is not the case. Instead, one should consider using alternative testing methods that account for the heteroskedasticity, such as robust standard errors or White's test, which adjust the standard errors to be more reliable in the presence of non-constant variance.