|Heteroskedasticity: variance of error term is not constant.
Test using BP test
BP = nR
|F-test is unreliable. Standard error underestimated.
|Robust standard errors
Generalized least squares
|Serial correlation: error terms are correlated. Test using DW stat.
DW 2(1 – r)
|F-stat too high. Standard error underestimated.
Modify the regression equation
|Multicollinearity: two or more independent variables are highly correlated.||Inflated SE’s; t-stats of coefficients artificially small
|Omit one or more of the independent variables|