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Asymptotic Theory for OLS

Asymptotic Theory for OLS

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Published by Segah Meer
Econometrics - Asymptotic Theory for OLS
Econometrics - Asymptotic Theory for OLS

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Published by: Segah Meer on Sep 14, 2013
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Colin Cameron: Asymptotic Theory for OLS
1. OLS Estimator Properties and Sampling Schemes
1.1. A Roadmap
Consider the OLS model with just one regressor
y
i
=
βx
i
+
u
i
.
The OLS estimator
b
β 
=
³P
i
=1
x
2
i
´
1
P
i
=1
x
i
y
i
can be written as
 b
β 
=
β 
+
1
P
i
=1
x
i
u
i
1
P
i
=1
x
2
i
.
Then under assumptions given below (including E
[
u
i
|
x
i
] = 0
)
 b
β 
p
β 
+plim
1
P
i
=1
x
i
u
i
plim
1
P
i
=1
x
2
i
=
β 
+0plim
1
P
i
=1
x
2
i
=
β.
It follows that
b
β 
is
consistent
for
β 
.And under assumptions given below (including E
[
u
i
|
x
i
] = 0
and V
[
u
i
|
x
i
] =
σ
2
)
√ 
(
 b
β 
β 
) =
1
√ 
P
i
=1
x
i
u
i
1
P
i
=1
x
2
id
 N 
h
0
,σ
2
³
plim
1
P
i
=1
x
2
i
´i
plim
1
P
i
=1
x
2
id
 N 
"
0
,σ
2
µ
plim1
X
i
=1
x
2
i
1
#
.
It follows that
b
β 
is
asymptotically normal
distributed with
b
β 
a
 N 
0
,σ
2
³P
i
=1
x
2
i
´
1
¸
.
1.2. Sampling Schemes and Error Assumptions
The key for consistency is obtaining the probability of the two averages (of 
x
i
u
i
and of 
x
2
i
), by use of laws of large numbers (LLN). And for asymptotic normality the key isthe limit distribution of the average of 
x
i
u
i
, obtained by a central limit theorem (CLT).Di
ff 
erent assumptions about the stochastic properties of 
x
i
and
u
i
lead to di
ff 
erentproperties of 
x
2
i
and
x
i
u
i
and hence di
ff 
erent LLN and CLT.For the data di
ff 
erent
sampling schemes
assumptions include:1. Simple Random Sampling (SRS).SRS is when we randomly draw
(
y
i
,x
i
)
from the population. Then
x
i
are iid. So
x
2
i
are iid, and
x
i
u
i
are iid if the errors
u
i
are iid.
 
2. Fixed regressors.This occurs in an experiment where we
x the
x
i
and observe the resulting random
y
i
. Given
x
i
xed and
u
i
iid it follows that
x
i
u
i
are inid (even if 
u
i
are iid), while
x
2
i
are nonstochastic.3. Exogenous Strati
ed SamplingThis occurs when oversample some values of 
x
and undersample others. Then
x
i
are inid, so
x
i
u
i
are inid (even if 
u
i
are iid) and
x
2
i
are inid.The simplest results assume
u
i
are iid. In practice for cross-section data the errorsmay be inid due to conditional heteroskedasticity, with V
[
u
i
|
x
i
] =
σ
2
i
varying with
i
.
2. Asymptotic Theory for Consistency
Consider the limit behavior of a
sequence of random variables
b
as
. Thisis a stochastic extension of a sequence of real numbers, such as
a
= 2 + (3
/N 
)
.Examples include: (1)
b
is an estimator, say
b
θ
; (2)
b
is a component of anestimator, such as
1
P
i
x
i
u
i
; (3)
b
is a test statistic.
2.1. Convergence in Probability, Consistency, Transformations
Due to sampling randomness we can never be certain that a random sequence
b
, suchas an estimator
 b
θ
, will be within a given small distance of its limit, even if the sample isin
nitely large. But we can be almost certain. Di
ff 
erent ways of expressing this almostcertainty correspond to di
ff 
erent types of convergence of a sequence of random variablesto a limit. The one most used in econometrics is convergence in probability.Recall that a sequence of nonstochastic real numbers
{
a
}
converges to
a
if for any
ε >
0
, there exists
=
(
ε
)
such that for all
N > N 
,
|
a
a
|
< ε.
e.g. if 
a
= 2 + 3
/N,
then the limit
a
= 2
since
|
a
a
|
=
|
2 + 3
/
2
|
=
|
3
/
|
< ε
for all
N > N 
= 3
/ε.
For a sequence of r.v.’s we cannot be certain that
|
b
b
|
< ε
, even for large
,due to the randomness. Instead, we require that the probability of being within
ε
isarbitrarily close to one.Thus
{
b
}
converges in probability
to
b
if 
lim
→∞
Pr[
|
b
b
|
< ε
] = 1
,
for any
ε >
0
. A formal de
nition is the following.2
 
De
nition A1:
(
Convergence in Probability 
) A sequence of random variables
{
b
}
converges in probability
to
b
if for any
ε >
0
and
δ >
0
, there exists
=
(
ε,δ 
)
such that for all
N > N 
,Pr
[
|
b
b
|
< ε
]
>
1
δ.
We write
plim
b
=
b
, where
plim
is short-hand for
probability limit
, or
b
 p
b
.The limit
b
may be a constant or a random variable. The usual de
nition of convergencefor a sequence of real variables is a special case of A1.For
vector random variables
we can apply the theory for each element of 
b
.[Alternatively replace
|
b
b
|
by the scalar
(
b
b
)
0
(
b
b
) = (
b
1
b
1
)
2
+
···
+(
b
KN 
b
)
2
or its square root
||
b
b
||
.]Now consider
{
b
}
to be a sequence of parameter estimates
b
θ
.
De
nition A2
: (
Consistency 
) An estimator
b
θ
is
consistent
for
θ
0
if 
plim
 b
θ
=
θ
0
.
Unbiasedness
;
consistency. Unbiasedness states E
[
 b
θ
] =
θ
0
. Unbiasedness permitsvariability around
θ
0
that need not disappear as the sample size goes to in
nity.Consistency
;
unbiasedness. e.g. add
1
/N 
to an unbiased and consistent estimator- now biased but still consistent.A useful property of plim is that it can apply to
transformations of randomvariables
.
Theorem A3
: (
Probability Limit Continuity 
). Let
b
be a
nite-dimensional vector of random variables, and
g
(
·
)
be a real-valued function continuous at a
constant vectorpoint
b
. Then
b
 p
b
g
(
b
)
p
g
(
b
)
.
This theorem is often referred to as
Slutsky’s Theorem 
. We instead call TheoremA12 Slutsky’s theorem.Theorem A3 is one of the major reasons for the prevalence of asymptotic resultsversus
nite sample results in econometrics. It states a very convenient property thatdoes not hold for expectations.For example,
plim(
a
,b
) = (
a,b
)
implies
plim(
a
b
) =
ab
, whereas E
[
a
b
]
generally di
ff 
ers from E
[
a
]
E
[
b
]
.Similarly
plim[
a
/b
] =
a/b
provided
b
6
= 0
.3

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