What is heteroskedasticity?



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Posted on (Answer #1)

Heteroskedasticity refers to a state where the variation in the value, defined by the standard deviation, of a variable is different for different periods of time. For example, the price of a stock may have a standard deviation that changes every month of the year in a random fashion. Heteroskedasticity can be conditional and unconditional, in the former case it is impossible to predict the variance in price for any period of time, in the latter there may be a pattern based on time of year or other variables.

Regression analysis to identify a pattern in the price of an asset is greatly hampered by the presence of heteroskedasticity. 

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