Question

Q1: Explain what homoscedasticity is. Why is heteroscedasticity a violation of the Gauss-Markov Assumptions.

i.e. explain why MLR.5 is necessary.

Answer 1

Homoscedasticity means that the error term also called as random error or the noise is same across all the values of the independent variable. This means that the variablity of the noicse does not change with the change in the value of the independednt variable.

Gauss markov assumptions talks about the normality and the homoscadasticity etc. But hetro scadasticity violates it because it states that the variablity of the variable differes with the different values of the Independednt variable. It willl be in a range. Which is not the same as stated in the homoscadasticity.

Gauss markov used MR5 which says that the error term is honoscadastic. It is necessary to keep it homoscadastic to predict the values. If the nise term also changes its variability then it is very difficult to predict the values. So it is important to maintain MR 5 that is homoscadisticity.