Econ 170 - Fall 2005

The classic example of heteroskedasticity of a know form and the classic correction:

Avoiding obvious heteroskedasticity is often a matter of using a sensible functional form.

Using logarithms is also a common way to avoid obvious heteroskedasticity.

The ARCH model, which envisions serial correlation in the error variance, has been very popular in explaining volatility clustering in the financial markets.