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Hard · statistical_analysis · Quant Researcher interview question · breusch_pagan, heteroskedasticity, regression_diagnostics, ols_residuals, statistical_analysis
Heteroskedasticity, or non-constant residual variance, invalidates standard error estimates in regression-based factor models, leading to unreliable statistical inference in alpha research. The Breusch-Pagan test is a formal diagnostic for detecting heteroskedasticity by regressing the squared residuals from an initial OLS regression against the original explanatory variables. This problem implements the Koenker (1981) studentized variant of the test, which is robust to non-normality in the erro