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Econometrics - Theory and Applications with EViews_ 2005 [Vogelvang].pdf

Econometrics - Theory and Applications with EViews_ 2005 [Vogelvang].pdf

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[n this section, we look at some properties of estimators in general, which are considered
as desirable. Then, in the following section, we check whether the OLS estimator has these
properties. Also, the usual notation will be introduced. Knowledge of these properties is de-
sirable when doing empirical research, because one has to know about the interpretation and
quality of the estimation results. [n fact, familiarity with basic statistics for econometrics is
essential. This book does not discuss statistics, but some statistical concepts will be outlined
for a better understanding of the econometric methods and their properties. These concepts

are important for reviewing estimation results and writing a research paper correctly.

The introduction will be done for the parameter !i, in the simple bivariate linear model

( 1.6):

Y, = (3, + f3,X, + u,.



An estimator is a stochastic variable. The estimator of (32 is written as f3,. The estimator (32
has a probability distribution which is written as fe . The computation of a point estimate



(32 for f3" based on a random sample, is identical to drawing a number from tltis distribution.
The notation for an estimator and an estimate is identical, but it will be clear from the text

what is meant.

Desirable statistical properties of estimators

Unbiased ness




E(Il.) = ~2

Figure 4.2: The sampling distribution of

ih : fii" with E(ih) = (h




If an estimator fh has the property that the mean E(f3,) of its distribution function iii, is

equal to the unknown parameter 132, then the estimator is called an unbiased estimator. This
is written as:


E({J,) = fJ2·

The sampling distribution Iii of fi2 ma~ look as shown in Figure 4.2.
The difference between tb'e estimate h (the draw from the sampling distribution) and the
mean fi2 is called the sampling bias or sampling error. If it is possible to take many draws
from this distribution, then the mean value of these draws should be in tbe neighbourhood
of fi2, or the mean of the sampling errors should be close to zero. However, observations on
economic variables, the data, are only realised once, so only one estimate of fJ2 is obtained.


An estimator is an efficient estimator if, in some well-defined class of estimators (e.g. the
class of linear unbiased estimators), it is the estimator with the smallest variance.



The estimator fi2 is a consistent estimator of fi2 if the distribution iii collapses at the point
fi2 into a straight line when the sample size n goes to infinity. This me'ans that, for increasing


n, the variance of fJ2 goes to zero, and in cases where the estimator is biased, the bias also

goes to zero. The distribution of the estimator, like the one in Figure 4.2, becomes narrower
and narrower when n increases, and becomes degenerate at the point
rh. The usual notation
to show that an estimator is consistent is:

P lim (h,n) = fi2.

n .... ""


Chapter 4. Description of the Reduced-Form Model


The notation fh,n stands for the OLS estimator of fh applied for a sample with n observa-


tions. P lim stands for probability limit. The series i32,n converges in probability to fh if
n goes to infinity.'

Some properties of the P lim operator are summarised and then used to consider the
(in)consistency of the OLS estimator in Section 4.7. The following rules are valid. Not all
rules hold for the expectations operator E, except when the variables are independent.

P lim (xn + Yn) = P lim (xn) + P lim (Yn)




P lim (xn -Yn) = P lim (xn) -P lim (Yn)




P lim (xn . Yn) = P lim (xn) . P lim (Yn)




P lim (xn/Yn) = P lim (xn) / P lim (Yn) , if P lim (Yn) op O.





Similar rules can be given for random matrices or vectors, if the multiplication is possible,
and the matrix X is not singular:

Plim (:x'y) = Plim (X)· Plim (y)




Plim (X-I) = (Plim (X))-', etc.



Only minor attention to asymptotic behaviour of estimators is given in this book, as asymp-

totic theory is a topic that is beyond its scope.


The consistency property implies that the estimator i32 itself does not have an asymptotic
distribution. If asymptotic behaviour of the estimator is to be studied, the estimator must

be rescaled and the asymptotic distribution of Jii (lh,n -i32) is to be determined. This

will not be discussed further; only passive knowledge is needed to understand the practical
implications for the estimation result of some model specifications. (See other econometric
or statistical textbooks for a more theoretical discussion on this topic.) Example 4.1 is given
to illustrate the above introduced concept.

• See the difference between the definition of the concept 'limit' and 'probability limit'. For a detenninistic
variable the limit
x of the series Xn is defined as: lim Xn = x if for every f: > 0, there is a number N such




for every n > N : IXn --xl < E.

In case the variable Xi is a stochastic variable, il can be true that for any f: > 0 with positive probability
IXn -xl >
e for all n. Therefore the concept 'converging in probability' is introduced. If Xn is a sequence of
stochastic variables, thea
the Xn converge in probability to a constant x for n -t 00 if for every e and 0 > 0,
there is a number
N such thai

foreveryn> N: Prob(lxn -xl < e) > 1-O.

The number x is called the 'probability limit' (the P lim) of Xn; in notation:

P lim Xn = x .

• ->00

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