Heteroskedasticity in Fixed-Effects One-way Error Components Models: Evaluating the Performance of Standard Tests
This paper evaluates the performance of the Breusch-Pagan LM test and the White test for heteroskedasticity in fixed-effects one-way error components models. It contrasts the behavior of these tests under the fixed-effects model with the first differences model for different variance functional forms, degrees of heteroskedasticity and sample sizes. Monte Carlo results indicate both tests perform equally well in large samples. They are very sensitive to overall sample size, as changes in T or N do not affect the performance if overall sample size is held constant. The White test seems to be more reliable for identifying heteroskedasticity than the Breusch-Pagan test, even if we are able to identify the actual functional form of the variance. The performance of either test in small samples is poor.
Castilla, Carolina, "Heteroskedasticity in Fixed-Effects One-way Error Components Models: Evaluating the Performance of Standard Tests" (2010). Economics Faculty Working Papers. 27.