Advanced Econometrics Takeshi Amemiya arvard University Press Cambridge, Massachusetts 1985YS Takeshi Ameiva i Professor of Econ, Stanford Univers an ced ofthe Jour! femorisADVANCED ECONOMETRICS Takeshi Amemiya “The bock rode o exces verve of red: crn deelopmerts in such major subjects a6 ro. tie iferenc. ‘ode seecton mthed, fasbir gerealzod lout squsres tebmation rerines simutarcoss syste rode. de ‘rte espa ane, ad nie ependone ‘erie mel heres Mors University of Whee, Maison ‘Aasaneod Econaretress both acomprahensie efor graduue stots ard aeterence work {or ecerometncane. I wll ao ba vauble to thoee dong statistew mayen bi other ‘tea sence te man feeures te thorouh Troster of oer encton ede, necing {ualtatvecesponee madi, censor nd ru ated rogressen rol, ard Markov ar aur fen models, ae wel ca ngoruspreseneaton long same theory, clssscallast-tuares are (ererlae ist equares they, and nonnear ‘Srutanccus equation models ‘Aeigh the testmant a methemtily gor cs, the author has empoyed te heoren prot Pethed wih smo, nately sccecebe at ‘dumps. Ta erbles readers to wnderstae {ebase severed! each theorem anda ge raze or theraaves eperangan tel note St bile. Mary sole epleasons of thao Fre oe gvon either m Ue form of examples inte tse or as exercises Ui ond ct each Gaptornarder ts domenetrave ther essen presSore tp te te BBNGCit onset mer Preface “This books intend both sa reference bok for profeionsecosomeri- ‘dans and asa gradu textbook. If wed as textbook, the Material ‘contained inte book canbe aught in a yearlong couse, ws Thave donee Stanford for many years. The peequites fo such a cours shoul be ene ear of calcu, one quarter or semester of matrix anal, one ear a Intermediate satisica ference (eit of ethos in aoe | of Chapter 3), and, preferably, knowlege of introductory or intermedi econometrics (sy.atteleveloffohntn, 1972) Tiss requirement isnot nes, but TThave fund inthe ps tht ¢ majority of economics students Wh tie a tyatuate couse in adanced econometrics do have hnowiedge finvodc: {ory or inermedite econometric, “The main features ofthe book are the flowing a thorough tetment of lass squares theory (Chapter and penerize es squares theory (Chapter 6) grou dlacuon of age amie theory (Chapters 3nd 9) etal analysis of quaiativerespoase modes (Chapter 9) censored or ‘wuncuedregesion modes (Chapter 10), and Matioy chin and daraton| ‘models (Chaper and diacuson of nonlinear simultaneous equations ‘models (Chapter). "The book preseas only he fundamental of ine sis nasi (Chape 5 ‘and par of Chape 6) because there are sever exclet exo 0 the ‘ubje (ethe references ced at the begining of Chapter acon. the ‘model icon in the st three chaptershave been wes extensively rece ‘conometric applications bu have not revi any etbookascomplee "weament as give them bere, Some tractors may wih o supplement book mith extbok in ine eres anaes. ‘My dsasion ofa simultaneous equations models (Chapter 7s abo ‘bret Those wha wish study de abject penter eta sould cone the refereaceivenin Chapter’. chose to devote more pace to thedseusionof| onlinea simultaneous equtions models, which ar sill at an ery tage of evelopment and conseqsenly have resved oaly sant coverage in most textbooks.In many part ofthe book, and in al of Chapters 3 and 4, have wed the ‘theorem proof format and have aerpted o develop all the mathematica ‘ens rigorously, However, thant been my timo Present theorems all ‘mathematical genera. Because intended hisasatextbok er thanasa ‘monograph {chore atumption that ae relatively ay to understand ad thatlendtosimpl proof evnin those instances wher they could be eats ‘Thiswil enable renders to understand the basiestrucureofcah theorem nd tn generalize i for themselves depending on thei needs nd shies, Ma Simple spplietonsfheoremsate gen iter inthe formofexarpiesin the text rin the form of ener tthe end ofeach chapter to ing xt the ‘stent pnts of ach theorem ‘Although thst textbook in econometrics methedsogy, Ihave ineioded Ascusions of numerous empiial papers i iustate the practical tke of| ‘theoreal sult. This especialy conspcoous inthe ast the chapter of | the bok “Too many people have contributed tothe making ofthis book trough the ‘many reson thas undergone to mention al ter mames 1am epecily {Gael to Trevor Bree, Hideto Leimura, Tom MaCurdy, Jim Powel, {nd Gene Savin for ving me valuable commentson the entire anuscipt fam alo indebted to Car! Chris, Ar Goldberger, Cheng Hsin, Roger ‘Rocker, Tony Lancaster, Chuck Mani, and Hal White for heir valuable ‘comments on pars ofthe ranuserp. am grateful to Colin Cameron, Tom Downes, Harry Panic, Aaron Ha, and Choon Moon for prootreadingand to theft ee for eorecting my Engh, In adn, Tom Downe ‘Choon Moon bee! me withthe preparation of the index. Drang Pham has ‘yped mos ofthemanuscrpt throug several revision: er unfling patience ‘nd gon natre despite many hou overime work are mich pore. David Crnwe, Cathy Shiri, and Rac Hong Tran ave sls ped ith ‘the typing. Ths ancl support ofthe Nasional Ssence Foundation forthe ‘earch that produced many ofthe eu posentedin the book grt {cknowiedge. Final, 1am ndebed to teers ofthe ural of Feo rome Literature for permission och in Cages 9 pt of my ale ‘ntled “Qualitative Response Models Survey" (Journal of Ezonomie “Leeratre9:1483-1536,1981)25d10 Noa Halland Publnting Company foc peomlsion owen Chapter 10 the resed version of my aie entilat “Tobit Masts Survey" (Journal of Eonometris 243-61, 1988). Contents Clase Lees Squares Toory 1 Recent Dovlpments Regression Anas. 45 Large Sample Theoy 81 [Asymptote Properties ot Exverum Estimators 105 ‘Time Sees Anais 158 CGoreraized Least Squares Tory 181 nee Sataneoss Equations Mocs. 28 NoninearSimutanccus Equations Models 245 ‘Qualtatve Response Mocels. 267 ‘Tobit Moses 360 Markov Chan and Duration Wosls 412 Append Use Tarems in Matix Analysis 459 ‘Arpendx? Olsson Theory 4653, eten 465 Retorenes 475 Name index. 505. ‘ject Index 5111 Classical Least Squares Theory Tn this chapter we shal consider he asc results statistic inference inthe classi inca gesion model — the modelin which the repesorare inde pendent ofthe eo term and the ete srl wacomeluted and has onstant variance. Ths models tbe sarig point ofthe std the models to ‘eexamine in tr chaprs are madicaions of his ne. 411. Unear Regression Model 1 this section let us look at the reasons fr studving the Haear repession ‘model and the method of peciing it We salsa by defining Model Io ‘beconsidered throughout the chap. 11 nroseton Consider a sequence of KC random aril (i, 249+ + - ah SF. Deine a Taetor y= (jy. pls a (Ra DY vector a instante and a (A= Dx THrecor xt Gets... 28), Sanpete sake ofexpostion hat the ont density ofthe varies igzben by 2% where isa vector of enkown pare ten. We are concerned with infence about the parameter vector Bom he ‘bs fe observed vectors and x. in econometrics we are often interes in he conn dtibution of ‘eset of random variables ven aother set of andom variables or exam ‘le the concn! dibuion ofconsumsion gvenincomeand te cod. ‘ional dsribution of quantities demanded given prices Suppose we watt know the conditions distribution ofygienx®, Wecan writethe joint density asthe product of the conditional density and the marial density sin L193, =f BM 8 uy Regression analysis an be defined sats inferences on 6. For his rose we ean ignore fs, 8) provided there is relationship between @,2 onendEoameri and, The vector yiscaled he vec of dependent or endogenous ails, ad the vector x scaled the vector findeendent or exogenous variables. a regression analy we usually waat tesimate nl the rst and second ‘moments of the conditional dstbtion, ater than the whole parameter ‘ecto (In certain special cases the fist two moments characterize 0, comple.) Thus we can define regression anal tail inference 0n| ‘hecondiional mean E(x" andthe conditional vaance-covarance matt Viyfe) Gener these moments ar nonlinear functonsofx However ‘thepesntchaper we sal consider thespeil casein which ELyuisequl to BLjxt) and is near function of 7, and My) isa constant times an Semty matin. Such « model i elled the clasizal (or standard) linear regresion mode or the homatcdatis (meaning constant valance) Enea ‘egresion medel Beene hii the model toe sain Chap I, tu calltsimgiy Mode 1 112 Model ‘By wring = (1,377 We cam dline Model! a lows Assume WMP NIT, aa) whee sa salar observable random variable, ina Kector of unknown parameters 4 Kevector of known contants rich hit 3s nonin: la, nd salar, unobservable random variable (cal the err term forthe dturbance sch that By, = 0, P= o (another ution preter) fall and Eu, =O fore, "Nove that we have assumed x* tobe a vector of now constants. This satay equivalent stating tht we a cncered oly with estimating ‘heconditionaldibation fy gveea™. Th most important astmpton of ‘Mosel isthe linearity of Et); we therefore sal devote the next ube ‘ion toa discusionofteimplcatons ofthat assmgtion, Wehaveno made theastumptior of homoscedasiciy (74 ~ oral andthe assumption of| no sesalcorelation (i = OfOrr 9) notbecaue we ive that hey are ‘sed in mot sppitions but because they make & convenient ating int. These assumptions wl be removel in tr chapter. "We shal sometimes impose additonal astumptons on Model to obtain ceria specie esuls Notably, we shal occasionally make theaumption of ‘sel independence of (x) or the asumgtion thats normally dist {In gener independence i «ong astmpton than o coteation, a (Casal Lan Squares Theory ‘hough under normality the two concepts are equivalent. The ‘Miumptoas will bested whenever the are ntoduced nto Mode 11.3. bnpeaons of Unearty Suppose random variates and xf have rite second moments and thei ‘artnee-covarance matrix is denoted by Lal s3) “Then we can alvays write H hte 'A + cas) whee B,—Yali Bo By, Ga SaIBXt, Bey=0, Vj= ot — aie» tnd Ex? 9~ 0. Tisimporet geal Modlin cern assump tion that (1.1.3) das not (1.13) does not generals inpy linearity of| Lys) beste Bat) may not general be eo Wecal y+ 7B in (11.3) the est nee predic of piven because |B and f, can be shown to be the valves of fy and by that sisimize 120, ~ by a2», In contrast, the copdional mean Fx) ele he bet pedo of given x Because Hy, ~ Bly ELI a0 7 for any funtion “The reaer might ask why we work wih eq (1.1 2)atberthan with (1.13) “The antwer sat (1.13) ls so general tht i doesnot alow uo obtain meresing results For example, whereas the natural eimatos of ad ‘an be defined by replacing te moments of td x tat charac and ‘usher coresponding same moment (ey actully coincide with the leat squares eimator the mean of theeimato annot be evaled wth ‘ut specifing more about the relationship between and How restive the Hneaity of lx)? I old ify, and fae joint ‘normal orf andx are both seal dichotomous (Beran variable’ But the lncariy may sot old fer many imeresing distbutions Neverthe, ‘he Mesa assumption i tab revue as i ay appear at ft lace ‘because af canbe variables obtained by transforming the original indepen ent variables in various ways For example ifthe conditional mean ofthe upply of good, ta quadratic function of the pic, py we ean pu 2S (nr) hereby making EL)14 Marc Notation “Toft he subsequent ansiss, we shall wre. 2}n mate notation yaxate, aa where y= (nur Des Bethe st) and X= Uist. tn) im ote words, X isthe TO mney the eth row of hich ex, The elements ofthe mrs X are dsrbed at By Ae sae xe Bn in i, If we want to focus on the columes of X, we eae wie X= [orton ss Munk where cach xp a Fevecoe. If theres 90 danger of| cons Xp with, we eam dope prcehess and wie simply. 10 ‘atx notation th rumpions os Xand ucen be atlas flows X's onsngla, wtih is equivalent to ating rank (X)= KiCT = K; Bu 0 od’ = oy where ete 7% Tidenity mate (Wheneverthe sizeof ‘an ienty mats can be infeed frm the content, we wie timp as.) nthe reminds ofthis chaper we shall no longer use the prion f= Go.B0% iosend, the elements of wil be writen a B= (WisBso. ~~ »Ba)-Siry, we tal ot neces asm that ithe ‘tor fone, alow in practice this usally the cas Most of oar results ‘sl be bined simply oa the asumpcon that X ia matrix of constants ithootseciying speci values. 12. Theory of Lesst Squares ths section we shall define he eas squaresestimator ofthe parameter in ‘Node! ne al show ta ste best nar unbiased estar. We shal ‘bo discus estimation ofthe ero variance 2% 121. Defntion of Least Squares Estnator of and o? ‘The east squares (1) esimator of the regression parame in Made! 1 Aebced to be the value of Bhat minimize he sum of squared esi? ‘Glass ans: Saues Theo 5 SD =0-XB'G~XD oan yy BY MPH BE Puting the derivatives ofS) with respect to Beg! 90, we have s So ayy tawxpeo, can Ba. ) wher 95/8 denotes the Kecoe he th clement of wich is 5/8, bing ‘the ah element of, Slving (1.22) 8 ves b-ox n'y. 23, eas, {p atans the lal iia at {tus consider the special case K™= 2d (1, x,)and represent each ‘ofthe Tobecwation (5) # pat on the plan. ‘Then, geometry, ‘the et gunes esimates are the interept and the ope ofan daw in ‘sucha waythatthesum ofsquares ofthe devistionsbetween the poinsandthe lineis minimized inthe direction othe axis Dire eimates rest ithe sm of squares of deviations is minimized in any ober econ, ‘Given the les squares etitar we deine =9—XF 20) andealitne vector ofthe eat squares residuals, Using, wecan estimates? oy aera, cas) aed the ea squares exmator of 2, stbough the we ofthe term least sewaer heres ot as compeling asin the eximation of the rereson panne, Using (124, ween write yoNE+o=Py+My, 026) where P = XIX°X)-'X’ and M ~ I~ P. Because Gis orthogonal oX (tats, {GX 0) east squares estimation can be regarded x decomposing yo ‘orthogonal components a component tht canbe writen 28 ea comb ‘ation of the esl vectors of X and a component that is orthogoalX. ‘Altratvly, me eu call Py the projection fy nto the space spanned bythe ‘oluma vectors of X and My the progetion oy ont the pace Onthogonal 0 X. Theorem 16 Append! ivesthe proper of projection mati sch {SPM Inthespeial case where othy and Xare two-dimensional vectorsFie 1.1 Onboqseal decomposition of (Chatis,K= Land 7=2, the decomposition (12.6) can bested asin Figure 1.1, where the vertical and horizontal axes represent the fit and second observations respectively, and the arrows represent veto rom (1.2.6) we obtain viynyPytyMy. can “The goodness offi ofthe regesion ofy on X can be measured bythe tio 4 Pyiy's. sometimes called. However, tis more common to deine as ‘he quae ofthe sample conlation between y and Py rey yyy “where .= Ip TW ad deoteshe vector foes wesssume one of ‘he columns of Xi (which usual the case), we have LP= PL, Then we can ewes (128) Re 28) My a2) “Thus canbe interpreted ay measur of te goodsss oft oftherepeson ‘ofthe devationsofyfomiis mean on te devationsf he cols oF om “heir means. (Section 24 gives» madieation of suggested by The, 1961) 122 Least Squires Estnaor ofa Subst of 8 ‘tis sometimes uf to have an exp formula fora suet ofthe est ‘suarsesimates Suppose we partion f= (8, BDywtere ‘Cans Lae res Toy 7 tocan fins Kaci sch that Ki = Pariton X conforma XC iRr Then wen wie MAA Nf + Xap = Kir 1210) and XiXabs + XX, Xi. aay ‘Sotving (1.2.11) for Bnd iasering it into (1.2.10), we obtain B= OMX KIM. amy where My = 1~ XX) "XSi, B= OMX) MIM, 213, whee M, =I = X08) "%; In Mode {we assume that Xisof fil ask an assumption that implies that the matrices tobe inveed in (1.2.12) apd (1.213) ae bth ponsinglar. ‘Suppose fra moment that X if fill kb tat Xi oI this ee ‘cannot be estimated, bt sillean be esimated by modifying (1212) —8 Ay ~ oxox, KIMEy, a2 where Mf~1 = NI(XP XE) INF, where the columns oXfeonsis ofa mat- tual number oftinerytependentcolames aX, provide that XIE, i nonsingular. For the more ene problem of estimating near éombing- tion ofthe elements ff, see Sesion 2.23) 123 TheMeamand verones of fan Inveing (1.1.4 (1.2.95 me be snore ry «iz HAF OMT Ce, fy the sion of Noe | ng he od eof C15, we ine terns mao vin ah—wd-p caw = XT KAT! =0exr, rom (123) (1.24, weave 8 = Me, whee M= AP8 pesanced Economics Using the ropes ofthe projection matrix given in Theorem 14 of Appea- ix, weobuin eT EW Me ean by Theorem 6 of Appendix 1 -™EuMe -heeM = 1-87 Kyo? by Theorems 7 and 14 of Append which shows that 35 ised eximator of a. We deine the unbiasal fstimator of? by aac aa ‘We stall obtain the varian of ate, in Seton 1.3 unde the atonal sumption tht wi normal "The quuniy Vii canbe estimate by sbetutng either or 3 (defined shove the 0 that appears inthe righthand side (1.2.16) 4124 Defiton of Best Before we prove that the least squars estimators best inca uabased, we ‘ust eine the erm Bet Fist wes define t for walaremators thes for DDerosrion 121. Let Gand bel eimai oe parame. “Peano is si tbe a tas aod aa see a) oe Sinator it 10~0} = FU" ~ Oforllparamctervae The esimator Eis tobe eter or more ein) an he esate Oi Oi ets fod sO and U0 0 < 10 ~ 9 fr at eas oe parameter vale 80 ‘Simard to eB or fin in casi Deer han yor ‘Simao inthe cae. ‘The mean squared ero ia reasonable criterion ia many station and rmathematially convenient. So, flowing the convention of the stitial erature we have dened "bette tomemn "having smaller mena squared ‘eroe” However, thre may besiuatons in which researcher Wishes 10 we ‘ther eter, sch asthe ean absolute err Denison 1.22. Let and *beestimatorsfa vector parameter ®t A fand be. their respective. mean squared. eror mates, thai, 9=EG— OO OF dB = EO ~ EXO" ~ BY. Then wosayBiseter(or (Cuscal Least Squares Thery 8 ‘more fen) than 6 if eB Aye = 0 forevery vector €- and every parameter value 29) @—Ae>0 foratlasonevalveof ¢ and 1.220) sleet one vale ofthe parents, “This etniion of beter early coincides wih Definition 12.1 if isn clr Tn view of DeSintion 121, eguvalest fons of satements (1219) and (220) re satements (1.221) and (1.222) eG inateat apgoodas © foreveyvesor © (122) and 8 istotertan 0 forateatonevalurof (1222) ‘Using Theorem 4 of Appendix they ao can ewe as BEA forevery parameter lve 2a» and BA. frat teas one parameter value, (220 (Note thee 8 =A mean Bais postive dette) We sll now prove the equivalence of (1.2.20) and (1.2.24), Beene the pirate“ at east one parameter alu” common bth sae ments We Shalgnore tin the flowing roo it, suppose (1.2.24 isnot te. Then A. Therefore "(BAe =O for evry ea condition tat impis hat (12.20) isnottme. Second suppse (1.220) snot tv. Tene’ (B— Ale =O Forever and every gona elemeat of B~ A mus be (chow eto be the zero vector excepto ie hethpostion).AothelhelementofB— Ais (Oehose eto beth zero vector, exept fr inthe and th poston, and note thst B~ Ais symmetry. Ths (1.2.24) not re. This completes the rot. ‘Note that replacing BA in (1.228 with B> A—or making the come= 20)0r(L-2.22)— ewe because wecouldntthen Ais nonneatvedefite and B> A means10. Acvenoed Econo Digher han the estimator withthe mean squared ero matic [i i} A probim with Definition 1.2.2 (more precisely problem inherent in the compare of vector estimates rater han in thi enon stat often t does ot alow soy one etimator seer eter or worse than th tet Forexample, consider a-[} J oe a f3 e a2a9 (Clery, ether A = B nor B = A tn such case ove mph compare the ‘nace and conciue tat @is beer than &* beau tA Another examples - fda nf 4 om ‘Again nether A= B nor BE A. oe wee using the determinant asthe ‘tron, ne would eter over @ because det A< det Noe that BS A implies both te & er A and det & det A. The ist feign rom Theorem 7 andthe senod fom Therem 1! of Append 1 As the wo case sow, ae te A wor et BS A gin ‘Use ofthe tceasa criterion hasan bviosintultve app inne st isthesum of the ndvidual variances tien fr the we the deter ‘aunt involvesmore complied reasoning Supposed ~ N,V) where Vis the varancecovarance matrix of 8. Then, by Tore 1 of Appendix 2, (G0yV-1G~ 8)~ 2, techisquaredinibuton with K depen of fe. oss being the number of cements, Threforethe(I a) conics lipid For @ defined by (a(-9'V-6-9) < 2210, 22 ‘where 3(o) isthe numbersuc that Prk x(a] ~ Then the volumeot {he elipnid (1.2.27) i proportional to the determinant of V, shown by Anderson (1958, p. 170 ‘A or intuitive jstlcation forthe determinant criterion is posible for the casein which i wo-dimensons vest, Let the mean squared ert ‘mats of an eimator = "be (asocalLent Sues Theory 11 ea : ee 6, = 6, + (6, — 0) Is mean squared error is ayy + %a3p + Deus and at Seer Se eres = a amour ae ee scent 4125 Lonst Squires as Best Lneer Unbiased Entiat GLUE) “The clas oflinear eimators of Bn be defined as tone etinatos ofthe form" yforany 7% Keonrtat mses Wecanfrtereat theca by imposing the usbiasaies condition, nares, ECy=B frat f 229) neg (1. ato (12.28), we obtain exeL 29) (Cleary, the LS eximator isa member ofthis as. The following theorem ‘proves that LS best fal the asa uae etimaor. ‘Turorny 121 (Gauss Marko). Leip ~ Cy where Cisa 7% X matin of constant such that C°X =I. Then fis beter than BiB Proof Because Y= B+ Cu because of (12.29), we have Ups = Be'w'C 123) =e = AORN + oC’ ~ OC ATIC” = OCT ‘The theorem fiom immediately by noting thatthe second term of the ls lise of (12.30 ise nonnepaie dete math, ‘We tal ow ivan aferatie poof, which consis an interesting point ofitsowa. The cla ofinear bined eimator canbe dened aera)sstheclas ftir ofthe frm (8°X)'S'y, where Sisany TX K mates ‘ofeonsans such ma 5X isnonsinguas, Whe its ind this we call, Inthe cas of eronenalvanabe estimators abbreviate as 1V) an cl be cole veto ofS nsrumenal variables. The variance ovine mats ‘oftV easy ante shown obe oS") 'S'S(X'S)-!-WepetLSwhen weput 'S=X, and the optimaliy of LS can be proved as follows. Beceie 1 S19'S'5"inonnegatve dette by Theorem 140) of Appendix me have XOXE X'SS'S)'8'X oan “nvering both ies of (1.231) and ang Theorem 17 of Appendix I, we btn the desired elt OXY SS 'R'S'SX'SH «239 In the preceding analysis we were fest given he es squares eimatorand then proceeded to prove tht itis best of al he near unbiased eimai ‘Suppose now that we knew nothing abou the east squatesestimator and had ‘olin the value ofthat minimises C°C inthe matrix sense (al ers ofaranking of matrices asd on the matrix inequality defines eal subject, tothe condiéon C°X = 1 Unlike the probem of salar minimiation,cal- ‘lus isof ma dec we In sch situation itis often tlt mine the ‘arince ofa linear unbiased eimator ofthe scala paameter whee pit tm arbitrary vector of known constants Lete’y be linear estimator ofp’. The unbassdes condition implies Xie p. Because Pe'y~ 07, the problem mathematical i Minimize ee subject to X'e= p 0239) Dene Seee-weare-py 0236 where 2isa Kvetorof Lagrange muir Setting the derive ofS with ‘eipect oc equal oO yells coxa, (1239) Premuliping both sides by X’and using the consent, we obtain = cxy 9 1236) Inserting (1.2.36) imo (1.2.39), we conclude chat the best near unbiased Cent Lest SqeeTheany 13 etimatrofp’Bisp(X°X)"X’y We therfore haven contacive poof of ‘Theorem 12 18 Model with Normaty In this section we shal conser Mol | with headed assumption af the joint normality of. Because no coreltion imps independence der ‘omality the (are now assed to be serialiyndepeadent We sal bow that he anim Iatthood esimator (MLE) of he epresion parameters dental wo the leas squares estimator and, wing the theory ofthe Came ‘Raolower bound sal prove that tise best unbiased estimator. We sal so dicos muniuum Ilibod eximation ofthe variance 0? 1.821 Maseru Likelhod Estimate Under Moce!1 with normality weave y ~ NOXf.o"D, Therefore the kl ‘ood function ven by La x02) * exp [-0549 —X9)' XB) aay “Taking the logarithm of ths equation and ignoring the terme tat do not band Q°—e~ 7. Then, because Si) doesnot depend on, the probim is eulalent 19 he misimization of 3'X°X8 under Q’3 = 7. Eguting te dsvatives of °X'XS + 24"(Q"8— 7) witrespectto andthe ‘evetor of Lagrange multipliers 4102, we obutn the Sluion SO MP'IQA'MT'OYy 4a “Transforming rom & and 7 tthe original variables, we can writ the mini mizing val ofS) B=f- cox Qewxr-Qr1@F-0. cas) “The conespouding esimator of can be deined as Bay BOD. as) seas to show thatthe and 3 are the constaine maximum tieinood estimators if we assame normality of win Mode 142 An Atrnave Deron ofthe Constraed Least ‘Squares Estrator Define KX (K~ ¢) matixRavch thatthe matin(Q,R)snonsingsla and R/Q=0.Sucha matican alunysbe ound itis ot uniguesodany mas22 omen anerares that satis thee conditions wil do. Then, defing A (Q, 8), 7 AB, tnd Z-= XA, we ca ete the basi model (11.8) 5 yexety any aXe 2+ {we prion 7 = (9, "where 7, = QB and = RB, we se thatthe ‘onsraits (41) sei and ae 7, aspect The vector has K—@ ‘ements thus we have reduced the problem of eximatng K parameters Subject og consins wo the probles of estimating Ke parameters Using 7,~e and A} =[QQ’O* RRR, se vee have fom (1.47) y=XQQ"OF!e = RE’ Late he east squares estimator of, in (1495 Sy RRR XRY"R’X’[y—XQQ'OY 40) Now, transforming fom back of by the rationship B= A, we obtain the CLS estimator of B B= RRX'XR ERX’ aay $11 = RRX’XBY*R'X'NIOO’OW"' [Note that (1411) ierent fom (1.4). Equation (145) is valid ony XX is nonsingular, wheres (1411) eam be dined eves EX is gala provided that R’X°XR snoesinglar. We can show that if’ Xs nosing Ue, (111) 8 uigoe apd equ to (1-48). Denote the right-hand sides of (0545) and (1.1) by Band, respectively. Then t ses) 1 show pte as) ary ‘Therefore, =the marin inthe square bracket boveisnonsnglr. But wehave fa ]-[O* 82] aan ‘whee th matin om the righthand side teary nonsingular because non (Onscal Lens Sqares Theory 23 sagt ong uy 8 Re em ace o] santana 143 Constrained Last Squares Estmatr as Best Linear ‘Unsasod Estrator the bes near unbiased eimator fet from the fc tha isthe ‘est near unbiased estimator of in (1.49); Bomever, meals cat Ow iret nseing (49) nto (.4.11) and weg (48, we obtain B= po RR’ XR RY ‘Therefore, i unbised and its vasance-coarance matixisiven by p= o*R’X'XRY sis ‘Westll ow ie the cls inearenimator by 8* = C'y~ ¢whereC"is aK x TrmsrxanddieaKecor.Thtclass broader than De das fear ‘tmatorsconsiderodin Seton 12S beats oftheadiveconsantd We {id not nce d previously because i the unconstrained mel the bi ‘edness condition would ensure = 0, Here, the unbiasednes condition @)= BimplieaC’X =1+ GQ’ anda = Geforsomeartiary ‘math G, We have V9") = a%C'C a in Eg, (1.2.30) and CLS ie BLUE ‘ecruse ofthe identity CC RRA XR’ aio, [C= ROX? XBY R/C! — ROR’X’AR RINT, where we have wed C°X = I++ GQ! and R'Q= 0 Me aie 14 Stochate Constants Suppose mead «stochastic error term om the righthand side of (14.1), opretn ain whet gvector ofrandom varies such hat By = Qand Evy? ~ By ‘making the constraints stochastic we ave departed fom the domain of s-24 peared zonomaes sia sass and entrd that of Bayesian satis, which tas the uae [known parameters fa random variables. Although we gener adopt he ‘lassi viewpoint otis book, we sal osasoally use Bayesian analy ‘whenever we liv it sheds ght on he problem at hand? Tn terms ofthe parameterization of (14.7) te eons (10.17) ae xsivaent © needy wan ‘We stall fist ive the oserie dsebution of, using prio istibution overall the ements of, beaut mathemati sper odo and ‘hn wr aha ra (418) a wht obtain te imi he variances af the ‘or stribtion fo 7 0 tian. We shal assume ois know, fr thi sumption males the algebra considerably simpler without changing the ‘eens Foradicusion ofthe one where pro dstipton sasumed on ‘Pas well se Zlner (1971 . 65) or Theil (1971, p70) ‘atthe pio density of be 9) sr exp (OYA NY p, 19) where Mi known variance covariance matin. Thus, by Bayes’, he esevir desi of pen Singin. vam = fo, aan = c.e07 (N= 2" +-M'm9-M), whee e doe ot depend on . Rearanging the ems ins the racket, we have ey 2n'o-2)+9-w'r'y—w aay AV ORTEM 20 YZ WO Heyy HOE OHM OTA M Y=) FO L+H toy two, where FAW Oey +O. a2 ‘Theretie the posterior dsebuton of 78 dy ~ NG RZ OY), any ‘cusscl Lenn Sate Theory 25 andthe Bayes eximatorof ys the powerie meat even in (1.422), Becase 7 AA the Bayes esimatr of is ive by Bea ANY NX + POHANG + Oy SOKEN ANY +A, 0426 ‘We sal no speci and so tha they confor to the stochastic con- srans(.418) Tiscanbe done by puting te fit glen equal toe (leaving the remaining K~ qeements pei ons thei vale donot ‘aura che nit we sal consider lat), puteng a5) ndthen taking infinity (hich express the asumption tht nothings ror krown about 7.) Hence, the it we have no inon-[7 9] use {osertng (1426 into (1.4.24 and wrtieg te fit g elements 2 , we Analy bain Ba 0cx+ 2007710 + 709, (az where 8 = fe _ ‘We have obtained the estimator as special cae of the Byes estimator, ‘butthisestimator as orginally proposed by The and oldherger(1961)and vas called the mized estimator on hers founds In tet Reais p> roach, Eqs (4) and 147) combined yetd system of equations L-LeleL} on ‘Note that th mulipicaon ofthe sod ie the equations by Arends {he combined error ean omens (Dat costa vac) hat 128) sists the sampton of Model I. Then Thal and Gabor ‘op the splat oie east enact (1438) a ope ‘onthe tesameesimatoras piven i427) Aner ayo ‘mere tis esate as Beer eimai in hl (197, 9.670. "Thera inten onsen wee the ayes (.427 08 the consned ast Sars eximator (141): The later bon the Tnitof before king only Ntethat Wireman ih ‘urintoniesmuchars# cinqualeatto? ~Oanequrlee thtbl 28 Aavncat oromanes implies that the stochastic clement csapeas fom the coasts (L4.17, ‘hereby reducing them othe sonstochasiconstanis( 141) Wesballdem- ‘nsrate this below. (Note thatthe limit of (1427) ag +o i ot (@Q7°'Ge because is singular; rather the mits a2 Kem with sank o 1 Because fis normal as shown a Eq, (1.34), we ve OA ~ Me o'Q'o'xy'Q) as dete upon hat iQ =0 Wi ¢= 1,0" ao esor Iisa wale Tee of-< “s Tagarmgs~ Me ane “This isthe test sisi one mould we if were knowa. As We ave shown | Ey (13). weave ass) ‘ean are (1.52 and (33) ee Brn einen Aso Tse 6 gpa ry sng BA och Sttund de dyed ctype Sattar feces, Hees Teoma orb gine wea se ich tet wih 7~ Kd ot eto, er ste ret ‘tte sbiatninnr of Sled 028) Noe a te eo Sinan ei otesandr Soon ath mmr Te ‘Setaiyeang’Pe cute ey eens) Wen aes oncta rosa, deed nt rave ose Te Cha) we slo a en ot oo (1.52 somal (at sprint hen Fi andr rode Sm Wes ator ta cme py as Fa asa)28 AovanondEeoraretes init (he exact defn wil be give thre). Therefore under generat iributons ofthe sani deSnedin (3.4 isasympeoaly buted MO, 1) and can be wed o test the hypodhess wing the standard normal ‘able Ty thiscse may bewedin place of because ag converestoo? in proba 152 TooF Tow Inti sion we shal consider the tet ofthe mull hyotiesa QA = eaeaas ‘healiematveypothess QB + ewhenitinvlves moe than ope const (atis¢> D. ‘Wes deive the Fes arasimpleansormaton of the iin ratio ext Seppse tat te Hkltood funtion sin general piven by L(E 8) {isa sample and sa vector of parameters. Lt the ul hypothesis be Hy ES, where Sys suse ofthe parameter space 0 ane the alternative hypothesis be #0 S, where 5; sanotee subset of. The the tno ‘ato tet is deine bythe lois proved: BELG o es itn TERE there schon 4 3810 ati PA <6) =a fora given sicance lee a. “Te ikliiood ratio test ay be justi om several grounds (1) isin tively appa ecase oft conneton withthe Neyman-Pearon lemma {Q)ltis known to ead to good tes in many cases. (3) has arympoialy ‘opinal proper as shown by Wald (94%), "Now lt yr obtain the etnood rato test of 78 asin Q’B-* ea Mode! with somaliy. When weuse the reulsof Sesion, hemumer- toe kelhond besos RRL~ Gee Mepl-05F%-XH'O-MB] 5) ass) messtymen, Because inthe present cs SUS she moe parameter space ofthe maximization be denominator of.) geared out without consi. ‘Therefore the denominator Hkalhood is ven by max L= Grd? exp [058% NA - XAT 57 mandir, (ssa tant Seuses Theory 28 ene, the heood aio te of QB = eis ass wheres choten a in (155). ‘We actualy we the equivalent et ass) where i appropriately chosen. Cary (18) and (8.9) can be made sguivaent by puting ~~ Kylie *?— 1). Thetes (1.59) icaie the Fest beoause under the ml ype is dsvibutedas Fla, T— K)-—the F diaibtion wih qané T— Kderes of fredom as wea show nex From (14.3) and (145) eave SA)- 5H =Q8-Q'MArNEF-9. — s10) ‘at since (18.1) holds even if Q is a matrix, me have by Theorem | of Appendix? sD 3h stn) ecause this chiaquare variable is independent of he chisquae variable ‘sven in (1.53) by an aplication of Theorem Sof Appendin 2 (or by the ‘independence of and, we have by Theorem 40 Append 2 1 FEED NOOO OF-9 pg rp, sin) ‘We sal nom give an ltenative motivation forthe ts satis (5.12). For this purpose, come the general problem of testing he ll phe ig: 0 0, whee 0 (0, 8,7 sa procimensonsl vector of parameters Stppos we with constrict atest sutiicon thes of nesta Bhat ‘sdsrbutedas A, VJunderthenullypothess where weassme Vio be ‘own diagooal marie or smplicy, Consider the owing two eo Reject My if G09 4)>6 san ang Reject Hy it G9 VG—8)>4, 05930 sce ononatres where and dare determined ao maketh pobabity of Type I eror ‘equa tothe same given value fr each tes. That (15.14) i prefered 0 (15.13)cas be argued a follows: Leto} ad af be the variance oF and 8, respectively and suppose a} of, Then deviation oom provider ‘Bester reason for reeting Hg tha the sume size devition of 8, om Oy becuse he later could be xo ty variability of rahe than by fees. of Hy. The tx nai (15.18) preity incorporates this consieraton. "Theta (15 {8)scommony ued forthe generate oa gvector9ands| ener variance-covarance matin V. Another atactvefertureof the ests ‘at = ayvi—0)~ 2, asi -Applving tise tothe est of he hypothesis (4.1), we ready se that the vest hould be Bsed on a8 asi6 ‘Thistes canbe exact valid only en ois known andhensfs analogous the saad normal sased on 1.5.2) Thusthe est sate (1.3.12) may ‘beregaed a atra adaption of (8.16 tothe suation where mus ‘Sresimated. (Fora igorovr mathematical dscasion ofthe optimal proper tes ofthe Fist, the eaer ie referd to Sel, 1959, p46). ‘By comparing (5.0) and (15.12) we immeiately note tat f¢~ 1 (and therefore isa row veto) the Fst s the quar ofthe static. Thi fact clea! indlatesthatifg= the tesshouldbeusd ater han the Fest Deense a oneal ts pole only with ees ‘Assad ete, (15.1 ols asymptotically even fi ot norma. Be cause #*~ G/T — 1) converges toon probly, the linear hypothesis an be teed without assuming normaly of w by using the Seca ent ‘ympeoialydisvibued a Some pope petro ase the tet ins sustion, The remark note 6 applies to this practice, ‘The F sate nven in .5.2) takes ona varity of frms as we inser. a ‘arity of pci ates ino Qand Asan example conser the case where Bisporioned asf = (BB) wher fsa K-vector and is K-vector Sac hat + KK and the al hypothesis specs B= Band leaves, ‘uspecied This hypothe canbe write in the form QPP by puting Q= (0,0), wbereO isthe KK, atin of erosand isthe identity mat ‘of sae Ky, and by painge= By Lsetg these vals into (1.512) ils (tassel Lens Squares Teay 1 TERA BONOVTA-B sy u v8 Be ~FK, T=). We an write (15.17 ina more suggestive form, Pariton Xa X= (X,,X,) confrmatly withthe partion of Band define M, =~ X(X%)7X}. Then by Theorem 13 of Appeadix I we have (O70, DT MX, csi) ‘Therefore, sing (15.18), we ean rewrite 5.7) 85 TK -BMM XA, aoa es Fi, TK) (519) OF parculariateest isthe further special atof(1 5.19) whee K; = 150 that ra seaar oeicent on the fist alma of X which we stume to be ‘te vector of ones (denoted ty) and where, =O Then M, somes = “Thee, using (L213), we ave A= Cx Kay, 329 501.519) ean aow be writen as KYRA GLY py Tm as2n Using he defiition of R given in (1.29, can este (15.21) as T-K_& oR since 88 = y'Ly — yLXA(XSLX,)NGLy because of Theorem 15 of Appen {ix Theale fsa (5.2) usual appearsincomputer peatoutsand ‘scommeny interpreted ae the essai or the hyponen hat the pops tion counterpart of Rsequal 0, 153 A Testo Structure Change when Varnces Ave Equal ‘Seppo we have wo repression regimes KA tm 032m Ren RK LT= sz) and veh 32652 Aevarced coronas ate Siem efahew-[ Peale al ee Sorbet meee Spasms maa Se eee eee gees enero conan caer eamreecae Siete ces iaeeceoee ee ecm yoXate, 329 shee =f, xe [Ai], ana wn ft vhh fish eB) ef) “Then, since 0 = fo, (1.52) the sme a Model 1 wt rma ‘cs we san repeat our optha = tea sandr ear ype ‘on Moda mth ormaliy by poting P= 7, +k 2R% g= Ke. = {1-“Tyande=O-Iening tae vast (12) eh et ate Etta) Y = Ayo +P —) " i eae AAU T+ T= 20, 0320 where = OXXiYIX:9) and f= (ONPGT Gs. ‘We shall now give am eterna destin of (1526) In (1.5.2) we combined Eqs. (1525) and (1.528) without making we of the hypotess B= Br ifwe make use aft we can combine the two equation at yest, asa where we have defined X= (XX) and Bf =f, Let Sethe sam of| Squared rel fom (2.5.25) that, = ¥0- XEN X 32H Case .cot Sqn Thay 3 and let SB) be the su of squared residuals from (13.27, thats B= yt xOCx"RYy, (529 Then wing (1.85) we bavet pe DET D-S)_prp, BB SD my yr -24 a0 Toone 526 (53, ema ow SB) 9h) = BANKER + KYA BD. say rom 339) eee wer[ifgJaaexarecre)y ns seston 1420 oct sh-r[- frye nada) om ety +91 Tet en aD SD eee sh- Sh) 536 0 8) [amram sr sexe SOX TR ORO, PRT sen eager xr)