Test of heteroskedasticity, Breusch, and Pagan (1979)

Breusch and Pagan (1979) designed a test to confirm or reject the null assumption that the residuals from a regression is homogeneous, that is, with a constant volatility. The following formula represents their logic. First, we run a linear regression of y against x:

Here, y is the independent variable, x is the independent variable, α is the intercept, β is the coefficient and is an error term. After we get the error term (residual), we run the second regression:

Assume that the fitted values from running the previous regression is , then the Breusch-Pangan (1979) measure is given as follows, and it follows a χ² distribution with a k degree of freedom:

The following example is borrowed from an R package called lm.test (test linear regression), and its authors are Hothorn et al. (2014). We generate a time series of x, y1 and y2. The independent variable is x, and the dependent variables are y1 and y2. By our design,...