Detecting and correcting for heteroscedasticity
Despite having a scary name, heteroscedasticity is a simple enough concept. It is derived from ancient Greek, where hetero means different and skedasis means dispersion. True to its name, heteroscedasticity is defined when the variability of a variable is different across another variable. In the context of a time series, we say a time series is heteroscedastic when the variability or dispersion of the time series varies with time. For instance, let’s think about the spending of a household through the years. In these years, this particular household went from being poor to middle class and finally upper middle class. When the household was poor, the spending was less and only on essentials, and because of that, the variability in spending was less. But as they approached upper middle class, the household could afford luxuries, which created spikes in the time series and therefore higher variability. If we refer back to Figure...