The advantage of using heteroskedasticity-robust standard errors is that
A)they are easier to compute than the homoskedasticity-only standard errors.
B)they produce asymptotically valid inferences even if you do not know the form of the conditional variance function.
C)it makes the OLS estimator BLUE, even in the presence of heteroskedasticity.
D)they do not unnecessarily complicate matters, since in real-world applications, the functional form of the conditional variance can easily be found.

Question

Quizplus · Accepted Answer

Heteroskedasticity-robust standard errors produce valid inferences even if the form of the conditional variance function is unknown, which is different from homoskedasticity-only standard errors. This is a significant advantage in applied econometrics because the conditional variance function is often unknown. Option A is false since computing heteroskedastic-robust standard errors is more complicated than computing homoskedasticity-only standard errors. Option C is incorrect since heteroskedastic-robust standard errors do not make the OLS estimator BLUE, but rather more efficient. Option D is false because in real-world applications, the functional form of the conditional variance is often unknown, and finding it can be challenging.

The Advantage of Using Heteroskedasticity-Robust Standard Errors Is That