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Masters Class
Chrispin Mphuka
UNZA
June 2010
1
b = β + X0 X X0 ε (1)
1
X0 X X0 ε
= β+
n n
1
X0 X X0 ε
p lim b = p lim β+p lim p lim (2)
n n
1
X0 X X0 ε
= β+p lim p lim (3)
n n
X0 X
Assume p lim n = Q a positive de…nite matrix
1 X0 ε
p lim b = β+Q p lim (4)
n
1
= β +Q 0 (5)
0
Xε
= β since p lim =0 (6)
n
X0 ε
since p lim n = 0 as follows;
X 0ε 1 n 1 n
= ∑ xi εi = ∑ wi = w (7)
n n i =1 n i =1
from the exogeneighty assussumption we have:
E (wi ) = EX [E [wi jxi ]] = EX [xi E [εi jxi ]] = 0 and
σ2 X 0X
but var [w jX] = E [w w 0 jX] = n1 X0 E [εε0 jX] X n1 = n n
σ2 X0 X
) var [w ] = n E n =) lim var [w] = 0.Q = 0
Recall:
b = β+ X0 X X0 ε (9)
1
=) b β = X0 X X0 ε
1
p X0 X X0 ε
=) n (b β) = p
n n
p
If the limiting distribution of the random vector n (b β) exists
then that limiting distribution is the same as that of:
" 1
#
X0 X X0 ε X0 ε
p lim p =Q 1 p (10)
n n n
1 p
p X0 ε = n (w E (w )) (11)
n
1 p
p X0 ε = n (w E (w )) (11)
n
We use the Lindberg-Feller CLT (D.19.A) page 913 Green 5th edition.
using the formulation, w is the average of n independent random
vectors wi = xi εi with means 0 and variances p
var [xi εi ] = σ2 E [xi xi0 ] = σ2 Qi . the variance of nw is :
1
σ2 Q n = σ2 [Q1 + Q2 + ... + Qn ] (12)
n
1 p
p X0 ε = n (w E (w )) (11)
n
We use the Lindberg-Feller CLT (D.19.A) page 913 Green 5th edition.
using the formulation, w is the average of n independent random
vectors wi = xi εi with means 0 and variances p
var [xi εi ] = σ2 E [xi xi0 ] = σ2 Qi . the variance of nw is :
1
σ2 Q n = σ2 [Q1 + Q2 + ... + Qn ] (12)
n
As long as the regressors are well behaved lim σ2 Q n = σ2 Q
n !∞
1 p
p X0 ε = n (w E (w )) (11)
n
We use the Lindberg-Feller CLT (D.19.A) page 913 Green 5th edition.
using the formulation, w is the average of n independent random
vectors wi = xi εi with means 0 and variances p
var [xi εi ] = σ2 E [xi xi0 ] = σ2 Qi . the variance of nw is :
1
σ2 Q n = σ2 [Q1 + Q2 + ... + Qn ] (12)
n
As long as the regressors are well behaved lim σ2 Q n = σ2 Q
n !∞
If [xi εi ] , i = 1, 2, ..., n are independent vectors distributed with mean
X0 ε
0 and variance σ2 Qi < ∞, and p lim n = 0, then
1 d
p X0 ε ! N 0, σ2 Q (13)
CM (Institute) nEconometrics Lecture 4 06/2013 8 / 32
Asymptotic normality of the OLS estimator
Therefore:
p d
n (b β) ! N 0, σ2 Q 1
(14)
Theorem: Asymptotic Distribution of b with independent
observations- If fεi g are independently distributed with mean zero
and …nite variance σ2 and the xik is well behaved, then
a σ2 1
b~N β, Q (15)
n
1 1
In practice we estimate n1 Q with (X0 X) and σ2 with
e0 e/ (n K )
1 h i
1
s2 = ε0 ε ε 0 X X0 X X0 ε
n K " #
1
n ε0 ε ε0 X X0 X X0 ε
=
n K n n n n
hence
( " 1
#)
n ε0 ε ε0 X X0 X X0 ε
p lim s 2 = p lim (16)
n K n n n n
ε0 ε
= p lim
n
= σ2
CM (Institute) Econometrics Lecture 4 06/2013 10 / 32
and the estimator of the Asy. Var[b]
s2
By product rule:
1
X0 X
p lim s 2 = σ2 Q 1
(17)
n
∂f (b)
C (b ) = (19)
∂b0
By the Slutsky Thoerem
p lim f (b ) = f ( β) (20)
∂f (b)
and p lim C (b ) = =Γ (21)
∂b0
Using the linear Taylor expansion:
Assumptions
-we have another n L matrix of instruments, Z . where L=K
- E [xi ,εi ] = γ 6= 0, hence p lim (1/n) X0 ε = γ
-[xi , zi ,εi ], i = 1, 2, ...n, are an i.i.d. sequence of random variables
-E xik2 = Qxx,kk < ∞, a …nite constant, k=1, 2,...,K
-E z2il = Qzz,ll < ∞, a …nite constant, l=1, 2,...,L
-E [zil xik ] = Qzx,lk < ∞, a …nite constant, l=1, 2,...,L, k=1, 2,...,K
-E [εi jzi ] = 0
P lim (1/n) Z0 Z = Qzz , a …nite positive de…nite (assumed) matrix
p lim (1/n) Z0 X = QZX , a …nite, L K matrix with rank K
0
p lim (1/n) Z ε = 0
1
X0 X X0 ε
Now, p lim b = β + p lim p lim (29)
n n
= β + Qxx1 γ 6= 0
a h 2
i
) bIV ~N β, σn Qzx1 Qzz Qxz1
Estimated Residuals:
h i
1 1
bε= y Xb IV = y X Z 0X Z 0y = I X Z 0X Z0 ε (37)
bε0bε
b2 =
σ (38)
n
1 h 1
i 0 h
1
i
= I X Z 0X Z0 ε I X Z 0X Z0 ε
n
1 1
ε0 ε ε0 Z X 0Z X 0X Z 0X Z 0ε
b2 =
=) σ + (39)
n n n n n n
1
ε0 X Z 0X Z 0ε
2 (40)
n n n
ε0 ε
b2 = p lim
hence : p lim σ = σ2 (41)
n
a h 2
i
) bIV ~N β, σn Qzx1 Qzz Qxz1
y = β0 + β1 x1 + ... + (47)
βK (δ0 + δ1 x1 + ... + δK 1 xK 1 + θ 1 z1 + rK ) + u (48)
= α0 + α1 x1 + ... + αK 1 xK 1 + λ1 z1 + ν
where ν = u + βK rK , αj = βj + βK δj , λ1 = βK θ 1