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Walter Sosa-Escudero
Econ 507. Econometric Analysis. Spring 2009
Walter Sosa-Escudero
Box, G. E. P. and Draper, N., 1987, Empirical Model-Building and Response Surfaces, Wiley, New York, p. 424.
Walter Sosa-Escudero
Motivation
Our last attempt with the linear model
So far we have assumed we know the model and its
structure. The OLS (or the GMM) estimator consistently
estimates the unknown parameters.
Walter Sosa-Escudero
Walter Sosa-Escudero
Walter Sosa-Escudero
Proof:
i)
E(|x) = E y E(y|x) |x = E(y|x) E(y|x) = 0
ii)
E(h(x)) = E h(x)E(|x) = 0
Walter Sosa-Escudero
Walter Sosa-Escudero
Proof:
(y m(x))2
i2
(y E(y|x)) + (E(y|x) m(x))
2
2
=
y E(y|x) + E(y|x) m(x)
+ 2 y E(y|x) E(y|x) m(x)
=
Now:
The first term is not affected by the choice of m(x).
The third term y E(y|x) E(y|x) m(x) = h(x)(x), with
h(x) E(y|x) m(x), and is equal to zero, by the decomposition
property.
Hence, the whole expression is minimized if m(x) = E(y|x).
Walter Sosa-Escudero
Walter Sosa-Escudero
Walter Sosa-Escudero
= E[(y x0 ) + x0 ( ))2 ]
= E[(y x0 )2 ] + 2( )E[x(y x0 )] + E(x0 ( ))2
= E[(y x0 )2 ] + E(x0 ( ))2
E[(y x0 )2 ]
Walter Sosa-Escudero
Walter Sosa-Escudero
Walter Sosa-Escudero
Walter Sosa-Escudero
Walter Sosa-Escudero
Walter Sosa-Escudero
Empirical Illustration
Walter Sosa-Escudero