Estimation in the simple linear regression model when there is heteroscedasticity of unknown form

A well-known problem is that ordinary least squares estimation of the parameters in the usual linear model can be highly ineficient when the error term has a heavy-tailed distribution. Inefficiency is also associated with situations where the error term is heteroscedastic, and standard confidence intervals can have probability coverage substantially different from the nominal level. This paper compares the small-sample efficiency of six methods that address this problem, three of which model the variance heterogeneity nonparametrically. Three methods were found to be relatively ineffective, but the other three perform relatively well. One of the six (M-regression with a Huber φ function and Schweppe weights) was found to have the highest efficiency for most of the situations considered in the simulations, but there might be situations where one of two other methods gives better results. One of these is a new method that uses a running interval smoother to estimate the optimal weights in weighted least squares, and the other is a method recently proposed by Cohen, Dalal, and Tukey. Computing a confidence interval for the slope using a bootstrap technique is also considered.