Is the following statement True False or Uncertain You will

Is the following statement True, False or Uncertain. You will need to justify your answer.

Suppose the regression equation y= B₀ + B₁x + B₂z + u is estimated and heteroskedasticity related to z is indicated; then a possible solution is to remove z from the regression equation.

Solution

Heteroscedasticity is the violation of a very important assumption in the classical linear regression model. It is present when the size of the error term in the regression differs across their true independent values. It is a matter of degree and it is observed by using a scatter plot between the error term and the predicted value of the dependent variable if shows some trend. In the presence of heteroscedasticity, the standard errors are comparatively large and the estimates would turn out to be insignificant hence the regression cannot be used for estimating true values. In the above regression heteroscedasticity related to z is indicated and a possible solution to remove z from the regression is not efficient because it might remove heteroscedasticity but remove an independent variable may cause omitted variable bias which implies specification error and the results would not be efficient.

Hence the statement is False.