Answer-first summary for fast verification
Answer: =o+iX+2X + ni
The second step in the White test is to regress the squared residuals on a constant, on all explanatory variables, and on the cross product of all explanatory variables.
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A risk manager at Firm SPC is performing a heteroskedasticity test on a portfolio using the White test. In the context of this test, the portfolio is described by the following regression equation:
Here, the residuals are calculated using the formula:
Given this setup, which of the following options correctly identifies the second step in the White test for detecting heteroskedasticity in this portfolio?
A
=o+iX+2X + ni
B
= iX + y2X + ni
C
e? = Yo + YiXi + ni
D
= Yo + yiX + ni
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