Aggregation Bias
Author(s): Arnold Zellner
Source: Journal of the American Statistical Association, Vol. 57, No. 298 (Jun., 1962), pp. 348
368
Published by: American Statistical Association
Stable URL: http://www.jstor.org/stable/2281644
Accessed: 12/11/2010 10:58
Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at
http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless
you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you
may use content in the JSTOR archive only for your personal, noncommercial use.
Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at
http://www.jstor.org/action/showPublisher?publisherCode=astata.
Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed
page of such transmission.
JSTOR is a notforprofit service that helps scholars, researchers, and students discover, use, and build upon a wide range of
content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms
of scholarship. For more information about JSTOR, please contact support@jstor.org.
American Statistical Association is collaborating with JSTOR to digitize, preserve and extend access to Journal
of the American Statistical Association.
http://www.jstor.org
AN EFFICIENT METHOD OF ESTIMATING SEEMINGLY
UNRELATED REGRESSIONS AND TESTS FOR
AGGREGATION BIAS*
ARNOLD ZBLLNER
Universityof Wisconsin
In this paper a methodof estimatingthe parametersof a set of re
gressionequations is reportedwhichinvolvesapplicationof Aitken's
generalizedleastsquares[11to the whole systemof equations. Under
conditionsgenerallyencounteredin practice,it is foundthat the regres
estimatorsso obtainedare at least asymptoticallymore
sion coefficient
efficientthanthoseobtainedby an equationbyequation applicationof
can be quite largeif "independent"
least squares.This gainin efficiency
variables in differentequations are not highlycorrelatedand if dis
turbancetermsin different equations are highlycorrelated.Further,
testsofthehypothesisthatall regression equationcoefficient vectorsare
equal, based on "micro" and "macro" data, are described. If this
hypothesisis accepted,therewill be no aggregationbias. Finally,the
estimationprocedureand the "microtest" foraggregationbias are ap
plied in the analysis of annual investmentdata, 19351954, for two
firms.
1. Introduction ................................. 348
2. EfficientEstimationof SeeminglyUnrelatedRegressionEquations . ........ 349
3. Propertiesof the TwoStageAitkenEstimator . ................. 352
3.1. Moment Matrixand AsymptoticDistribution .......................... 352
3.2. The Gain in Efficiency .............................................. 353
4. TestingforAggregationBias .......................... 354
4.1. Testingwith MicroData............................................ 354
4.2. TestingforAggregation Bias withMacroData ...... ................... 356
5. Applicationof Methodsto InvestmentDemand . ................ 357
6. ConcludingRemarks ............................. 363
Appendix:................................................................. 363
A. LikelihoodRatioTest forMicroRegressionCoefficient VectorEquality ..... 363
B. Derivation of the AsymptoticDistributionof the Test StatisticEmployed for
Testing MicroRegression Coefficient VectorEquality . .............. 366
References ............................................................... 367
1. INTRODUCTION
348
SEEMINGLY UNRELATED REGRESSIONS AND AGGREGATION BIAS 349
ofthe disturbanceterms'variances and covariancesbased on the residualsde
rived froman equationbyequationapplication of leastsquares.' While we
apply this estimationprocedurein the analysis of temporalcrosssectiondata,
annual microinvestment data, 19351954, we recognizethat the procedureis
more generallyapplicable. For example, it can be applied in the analysis of
data provided by a single crosssectionbudget study when regressionsfor
severalcommoditiesare to be estimated.Anotherapplicationwould be in time
seriesregressionanalyses of the demands fora varietyof consumption(or in
vestment)goods. A fourthapplicationis to regressionequations in whicheach
equation refersto a particular classificationcategory and the observations
referto different points in space, as in Barten and Koerts' analysis of voters'
transitions from partyto partywithinvarious votingdistricts[2].
Further,withinthe estimationframeworka test ofthe equality of regression
coefficientvectors,and thusoftheabsence ofone importanttype ofaggregation
bias, is described and applied in the analysis of microinvestment relations.
Like the estimationprocedure,thistestingprocedureis moregenerallyapplica
ble. Finally, a procedurefor testingfor aggregationbias which utilizes just
macrodatais developed.
The plan of the paper is as follows.In Section 2 we describethe systemand
the proposed estimationprocedure.Section 3 is devoted to establishingthe
propertiesof estimatorsconstructedin Section 2 and to providingan explicit
statementofthe gain in efficiency oversingleequationleastsquaresestimation.
We then turnto some aspects of the aggregationproblemin Section 4, in par
ticularto considerationoftwo testsforaggregationbias, one employingmicro
data, the othermacrodata.Then the estimationand one testingprocedureare
applied in Section 5. Lastly, we presentsome concludingremarksin Section 6.
2. EFFICIENT ESTIMATION OF SEEMINGLY UNRELATED REGRESSION EQUATIONS
Let
y# X. + u,A (2.1)
be the ,u'thequation of an M equation regressionsystemwithyMa TX 1 vector
of observations on the u'th "dependent" variable, X,, a TXII, matrix with
rank 1,, of observations on 1, "independent" nonstochastic variables, #, a
l X 1 vector of regressioncoefficientsand u,,,a TX 1 vector of random error
terms,each with mean zero. The systemof which (2.1) is an equation may be
writtenas:
Yi ~Xi 0 ... 0  Uj
? jp:.
[2J= X2 + (2.2)
LYMJ ? .
? . . XM+ 2UM (
Y = X#+U (2.3)
I This procedure,modifiedin certainrespects,has been applied to estimatethe parametersof 'simultaneous
equation" econometricmodelsin reference[13].
350 AMERICAN STATISTICAL ASSOCIATION JOURNAL, JUNE 1962
' The quadraticformto be minimizedin the Aitkenapproachis not the sum ofsquares ofthe originaldisturb
that ofthetransformed
ance termsbut,as is wellknown, disturbances,namelyu'H'Hu, or u'2'u. As willbe pointed
out below,thereare good commonsensereasonsforapplyingleast squares to the transformed variables,reasons
thanthe classicalleastsquaresestimatorbased
whichmake clearwhyit is thattheAitkenestimatoris moreefficient
on the originalvariables.
SEEMINGLY UNRELATED REGRESSIONS AND AGGREGATION BIAS 351
1 = Vl(U)= . . 0I (2.6)
LoM 1I ... o.MMI
x X
L
_I
E
M
O'X14X
Sm#yul
crMl.XwX
(mXxl uM2X/vX
SM'XX2 .. * (MMX'MXM_i
Fl
b1 
~~1Xs'C
s X12 1 M
llXX sl2X1X2 ... S1MXlXM
1XX
s21X'Xl s22X'X2 s.
*S2MX'XM [u=l
b= 1{{1 (2.10)
It will be shown that b=b*+O(Tl), that T"12(b3) and Tl12(b*3) have the
same asymptoticnormaldistribution,and that the momentmatrixof b is:
and
A2 = ? i =
where 3(2), is O(T112) i.p. and terms of higherorder of smallness have been
neglected.Now the twostageAitkenestimatoris
b = (X'2; 'X)'X'2;'ly
SEEMINGLY UNRELATED REGRESSIONS AND AGGREGATION BIAS 353
or
b 
 WX3
= ( IX) X/ e lu
 V(b*) p (1 11 (3.8)
II (1  p2r,)
_ l+p(M 1)
5 This case was suggestedto the authorby one oftheJournal's editors(cf. [14] foradditionalresults).Since we
have illustrativepurposesin mind,we neglectthe fact that elementsof thedisturbancecovariancematrixmustbe
estimated.
SEEMINGLY UNRELATED REGRESSIONS AND AGGREGATION BIAS 355
coefficientvector in (2.2). One particularlyimportanthypothesisin the case
that X1, X2, * * *, XM are all of the same size and representmatricesof obser
vations on particularvariablesrelatingto different microunitsis the following
one:
Ho: f1i= 32 =***AM. (4.1)
are homogeneousinsofaras their
The hypothesisin (4.1) statesthat microunits
vectorsare concerned.Furtherif (4.1) is valid, therewill
regressioncoefficient
be no aggregationbias involvedin simple linear aggregation[7, 11]. That is,
with simplelinear aggregation,we form6
y= Sy# X=Zx X
I I 0 0 0 o 0 o
O I I ... 0 0 0 02 0
C,B= _ . (4.5)
O O O *.*. I I O
0 0 0..* I IJ FM
m _0_J
Theunitandzeromatrices in (4.5) are oforderIX 1.Thusthereareq= (M 1)1
as statedabove.Roy's [10,p. 82] veryelegantderivation
restrictions, ofthis
testdoes not involvethe likelihoodratio approach.However,as shownin a
straightforwardmannerin AppendixA, the likelihoodratio approachleads
to the same test statistic.If the disturbance covariancematrixwereknown
(4.4) wouldgivean exacttestof the hypothesis in (4.1). Whenan estimateof
thismatrixis employed in constructing theteststatistic,we showinAppendix
B thatthe resulting statistic,say P, is equal to the statisticin (4.4) plus an
errorwhichis 0(n1/2)in probability. Thenby a theorem in [5, p. 254], F will
havethesameasymptotic distribution as Fq,n_m.But,as showninAppendixA,
2 log X=qFq,nm+0(nl) where X is the likelihood ratio for testing the
hypothesis in (4.1). It is known[8, p. 259 and 12,p. 151] that 2 log X,and
thus qFq,nm (and qP), is asymptotically distributed as x2=X(M1)z, where
l(M 1) is thenumberofrestrictions involvedin (4.1).
For smallsamplesthereis some questionabout how to proceed.We can
computeqF anduse qP's asymptotic distribution,
X., assuming thattheasymp
toticresultsapply.Anotheralternative, whichmaybe better,wouldbe to as
sumethatP's distribution is closelyapproximated by thatofFq,nm.7
M1
r zl
M11(4.11)
Again a simpleregressionof y(t) on X(t) and Z(t)x(t) is all that is needed to test
the hypothesis of microparameter equality.Further,the procedurecan be
extended to applyto systems withmorethanoneindependent variablein each
regression.In all cases,however, is
theapplicationofthetest conditional upon
therebeingmeaningful the wi,and somevari
relationsbetweenthe weights,
able or variablesforwhichdata are available.
5. APPLICATION OF METHODS TO INVESTMENT DEMAND
To illustrate
themethods above,weutilizetheinvestment
described equation
developedby Grunfeld
[6] and in Boot and de Witt [4]. Grunfeld's
described
8If thisrelationis stochastic,say, wi(t) =ao +alz(t) +v(t), wherev(t) is a stochasticdisturbanceterm,the ap
proachshownbelowleads to a regressionmodelin whichone (or some) oftheindependentvariableshave "measure
menterror."Problemsofestimationand testingassociatedwithsuch modelsare not consideredin thispaper.
9 It is assumedthat Z(t) is an exogenousvariable.Or alternatively,Z(t) can be a polynomialin exogenousvari
ables.
358 AMERICAN STATISTICAL ASSOCIATION JOURNAL, JUNE 1962
.1..j
Yl'Yl
y11 yi'lIx
... . *=4395946.84 15769824.07 8003.2
_L
xi, * xi' _ 78628914.21 38826.5
20
Y 103869.607 221467.99 * 1531586.94 2045.8
L...
t YI'2lX2 ~ . . . . . . . . . . . . . . . . . . . . . ..
. ... .
=413156.104 974281.31 6153588.29 8003.2. .
.220345.72
. 1344261.18 1712.8
1=I
LX2yY2X21 X2 9942109.78 13418.2
20 1
and the remainingone is just the transposeof one already shownabove.
10Justtheupperpartsofsymmetric matricesare shown.It shouldbe notedthatthe elementsofV2 are givento
twodecimalplaces in the originaldata whereasall otherdata are givenaccurateto one decimalplace.
SEEMINGLY UNRELATED REGRESSIONS AND AGGREGATION BIAS 359
We firstcompute the singleequationleastsquares estimates in the usual
way to obtain:
0.151693870] 0.092406491
L1J[0.9026551189
F0211
$1
= = and A2 =2 0.052894127].
L"O"
1oJ 9.956306513J L p20 J L0. 509390038J
or
Y=XB+ 0.
Then,
OTo = (Y  XB)'(Y  XB) = Y'Y  B'X'XB
[Y1 Yi Y1 Y2 [1 X;fX111 1 Xl X202
Y1y2 2
_y2 0_p2XA X11 fX2/X2f2
[13216.5899 3988.01181
L 1821.28081'
which is equal to (T 3){spg} where T = 20, the numberof observationson
each variable. We now invertthis last matrixto obtain (T3) 1{I8}:
 .000223009584 .000488319216
_ .
~~~~.00161832608
We can now obtain the estimate of the moment matrix of the twostage
Aitken estimatorsby formingand invertingthe followingmatrix:
r Xll sl2X IX2]
X21XXl s22XI X2
The inverseof this last matrixis shown below. Elements on the diagonal are
estimated coefficientestimator variances while offdiagonalelements are
estimatedcovariances.
.0006006  .0000360  .1704 .0007562  .0000197  .0515761
.0001885  .3516 *  .0003914 .0001447 .0635894
789.6028 .4573140 .2731373 155.8156
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.0026914  .0005191 .1177480
L .0001972  .0878539
54.2149
360 AMERICAN STATISTICAL ASSOCIATION JOURNAL, JUNE 1962
To obtain twostageAitkencoefficient
estimates,we multiplythe last matrix
into the followingvector:
22.565127
73.180290
0.037338
[s1 Xy1+ s2XLY21=(T  3) . . . . . .
1Ls21X2
LS21X?i 2
s2 Y2X_'y
Iy, + s22X2
38.460988
293.105260
0.389245_
The pointestimatesso obtainedalong withtheirestimatedvariancesare shown
in Table 1. Also shownare the singleequationleastsquaresestimatesand their
estimatedvariances.
MicrounitCoefficient
of Coefficient Variance of Variance of
Coefcient coefficient Coefficient coefficient
estimate estimator estimator
M(T 1)
r2
[y=1
Y'sM'Xi~2yISA2X2j
2
pl ]
FX'X1s"l
[X2'Xis2l X2'X2s22
JLI Il
Xi X2s'12 1
(5.2)
X {[I I] Xe
X1s21 X2822jIM
[II XlX1s"
X2Xis21
XLX2s'2 1 C
X2'X28s2 I IX/
~1M~
2
where s8y'has been substitutedfor u88'; M=2, l1=3, T 1=17 and the unit
matricesare of size 3 X 3. Most of the expressionsappearinghave already been
computedin the estimationofthe system.However,the second inverseappear
ing in the expressionmustbe computed.We have
[XlXis"l XlX2s1211[ I] i,
[B11 B121[
A = ]LX2X1821 X2,X2822 I 2 2 22
L2_B21 B221
Then we form
[B11 B121[_ lA1[I XI] [B12 B121
or
y = Zf1 + u.
Now transformvariables by premultiplicationby H where H is such that
E(Huu'H') = aI. Let Hy=y, HZZ and Hu=u. Then we have forthe likeli
hood functionunderthe hypothesis,L(co),
IsIt is possibleto employthecoefficient
estimatesto obtaina newestimateofthedisturbancecovariancematrix
and thena new set of coefficientestimates,and so on. The smallsamplepropertiesof thisiterativeprocedurehave
not as yetbeen established.
g64 AMERICAN STATISTICAL ASSOCIAtION JOIYRNAL, ITUNJt1960
I (A. 1)
L(wo)= (2r) '(T )2MT exp [ ./]2
Whenmaximumlikelihood are substituted
estimators in (A.1), we obtain
',M T A2
M T
L(o) (27r) exp ['MT]
()
= (o,,
where42 = (1/MT)uf'U=(1/MT)(y A1)'(y A1) and b1=(2'2) '1'.
Underthehypothesis Q involving
no restrictions
on thecoefficients,
we have
thesystemin (2.3). Againwe transformthevariablesby premultiplication
by
H to obtain:
y
= 3+u,
wherey=Hy, X=HX and u=Hu. The likelihoodfunction
nowis:
LMT 2 j'MT
(Q)= (27r)(j ) exp
whichuponsubstitution
of maximumlikelihood
estimatesbecomes:
1M T 2 M T
( (27r) 2 g) exp ['MT]
wherea= (1/MT)>', = (1/MT) (Xb)'(yXb) and b (k'k)'X'y.
The estimated
likelihoodratio,X,is then
L 0co (^ )1
2)

L)_(A 2MT T
(&2>M
and
2 logX = MT log
whichis asymptotically
distributed
as X2(M1)1 [cf.8, p. 259 and 12,p. 151.].
We mustnowshowthat
2
0co ~q
= 1+ (A.2)
2
OD
n
nrm
Fq,n_m
n log n log 1+ q
= Fq,n_m
m nr nrnm
n n m (n  m)F
qFq, nm + O (n' )
SEEMINGLY UNRELATED REGRESSIONS AND AGGREGATION BIAS 365
and thenby theconvergence theorem in Cramer[5,p. 254],n log &2/&a=MT
log 62/52and qFq,n =(M1)lF(M1)l,M(Tl) have the sameasymptotic dis
tribution,namelyX%.
To showthat(A.2) is valid,we write:
2 2
q ?CDA A
Fq,n_m= 2
nrm O
Zbil(y Zbl)  Xb)  Xb) (A.3)
(Xb'(Xb)
xml0 0 ...Xi[L_I1
Then(A.4) becomes:
whereJ is a columnofunitmatrices.
y11x[(x/2;X)  J(J/X''lxJ)'J']X'2iy
or
y'T1X(X'21X)1[X'2lX  X'2>XJ(J'X'2''XJ)'J'X'2;X]
*(X'2;'X)'X'2;Iy. (A..5)
of { q/(nrm)} Fq,n_m,
For (A.5) to be equal to the numerator we musthave
X2_1X  X'21XJ(J'X'12'XJ)1J'X'2;X = C'[C(X'21X)1C']lC.
nrmXn
 2 ~~+O(tri)
q Xnm
The result in (B.7) gives us some confidencein employing F for our test
statistic;however,it must be recognizedthat thereis stillsome questionabout
the degreesoffreedomassociated withF in small samplessincein our procedure
2e is not an independentestimate of 2. The smallsamplepropertiesof P
deserve furtherinvestigation.Finally, it is to be noted that since the prob
ability limit of the errorin (B.7) is zero, qP will have the same asymptotic
distributionas qFq,nm, namely,a as indicated in part A of the Appendix.
REFERENCES