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STATA for Windows. ECN6540 Econometric Methods

COMPUTER PRACTICAL 3

Heteroscedasticity

1. Save the file with the *.dta extension called “practical 3” to your own drive.

The data contains the following variables:

LNWAGE = Log hourly wage rate

AGE = Age of individual

GRADE = Education grade completed

UNION = 1 if member of a trade union 0 otherwise

a.  Develop a multiple regression model to explain pay in terms of an individuals age, education and whether they are a member of a trade union. Interpret your results.

b.  Plot the squared residuals against the predicted values and each independent variable.

c.   Carry out a PARK test and WHITE test. Is heteroscedasticity evident in the data?

d.  Assuming that the error variance is proportional to education i.e. linearly related, transform the model and obtain the WLS regression.