Advanced Mathematics for Economics ©2023 Scott Hacker

Eigenvalues and Eigenvectors

I. Introduction and Mechanics
A. Why are we interested in eigenvalues and eigenvectors in economics and statistics?
a. They provide a methodology for solving a system of dynamic equations.
b. They provide a way to determine whether a system of dynamic equations is stable.
c. They provide some diagnostic measures for multicollinearity (the degree of linear relation
between explanatory variables in regressions) and provide a means of creating linear
combinations of variables that have zero covariance between them (relevant in principal
component analysis).
d. They tell us something about the sign definiteness of a matrix, which is helpful in determining
2nd-order conditions in multivariable optimization problems.

B. Finding Eigenvalues and Eigenvectors

For a square matrix A, if there exists a scalar c and a vector v ≠ 0 such that

Av = cv (1)

then for the A matrix

c is the eigenvalue (also referred to as the characteristic root or latent root)
v is the eigenvector (also referred to as the characteristic vector or latent vector).

0 
0 
Note: 0, the zero-vector, refers to a vector of all zeros, here a column vector: 0 =   .

 
0 
Equation (1) may be rewritten as

Av – cIv = 0
or
(A – cI)v = 0.

With v ≠ 0 , the columns of (A – cI) must be linear combinations of each other (the matrix is
singular, i.e., not invertible), so its determinant is zero.
a11 − c a12 a13  a1n
a21 a22 − c a23  a2 n
|A – cI| = a31 a32 a33 − c  a3n = 0,
    
an1 an 2 an 3  ann − c
which provides a way for finding the eigenvalue(s) c: find the determinant of A – cI, set it equal to
zero, and then solve for c.

Another useful rule is that if the matrix A has a zero eigenvalue, it has a zero determinant, so it is
not invertible.

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 0.7 0.2
Example: For A =   find the eigenvalue(s):
0.3 0.8
0.7 − c 0.2
|A – cI| = =0
0.3 0.8 − c
(0.7 – c)(0.8 – c) – (0.3)(0.2) = 0
0.56 – 1.5c + c2 – 0.06 = 0
c2 – 1.5c + 0.5 = 0
(c – 1)(c – 0.5) = 0
c = 1 and c = 0.5 are the eigenvalues.

In general, once a c is found for (A – cI)v = 0, v ≠ 0 , the associated eigenvector is possible to find,
but there happens to be an infinite number of them, being nonzero multiples of one another: if you
multiply an eigenvector associated with c by a nonzero constant, the result is another eigenvector
associated with c.

Example: Continuing the previous example, when using c =1, (A – cI)v = 0 becomes

0.7 − 1 0.2   −0.3 0.2   v1  0 

 0.3  v=  = 
 0.8 − 1  0.3 −0.2  v2  0 

Any vector for v that satisfies -0.3v1 + 0.2v2 = 0, or equivalently, v2 = 1.5v1, could serve as
1
an eigenvector here, so (setting v1 = 1 for simplicity) any nonzero multiple of   would
1.5
constitute an eigenvector associated with c = 1. In other words, we can say that the
1  k 
eigenvectors associated with the eigenvalue 1 are given by v c=1 = k   =   , where k is
1.5 1.5k 
any nonzero constant.

When using c =0.5 instead, (A – cI)v = 0 becomes

0.7 − 0.5 0.2  0.2 0.2   v1  0 

 0.3  v=   = 
 0.8 − 0.5  0.3 0.3 v2  0 

Any vector for v that satisfies v2 = -v1 could serve as an eigenvector here, so we can say that
1  m 
the eigenvectors associated with the eigenvalue 0.5 are given by v c=0.5 = m   =  ,
− 1 − m
where m is any nonzero constant.

1
If we set k = 1 and m = 1 for simplicity, we get the eigenvector   associated with the
1.5
1
eigenvalue 1 and the eigenvector   associated with the eigenvalue 0.5.
−1

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II. Diagonalizing a matrix
Suppose that there are n linearly independent eigenvectors for the n x n matrix A (note: linear
independence holds automatically for the eigenvectors associated with the n eigenvalues of A if
those eigenvalues are distinct, i.e. different from each other). With the columns of the matrix S
consisting of these eigenvectors, then S-1AS = Λ, where Λ is a diagonal matrix with the eigenvalues
along the principal diagonal (in the same order as the corresponding eigenvectors in the S matrix).
Under these circumstances, we can also write A = SΛS-1. This will be very useful in considering
difference equation systems, as will be seen in the next lecture.

Example:
0.7 0.2
From the previous example it was determined that A =   has two eigenvalues, 1 and
0.3 0.8
1 1
0.5, and that the eigenvector   is associated with the eigenvalue 1 and the eigenvector  
1.5 −1
is associated with the eigenvalue 0.5. We can create a new matrix S with columns made up from
these eigenvectors:

1 1 1  − 1 − 1 2 / 5 2 / 5 
S= , the inverse of which is S −1 = = .
1.5 − 1
 − 2.5 − 1.5 1  3 / 5 − 2 / 5
1 0 
With Λ =  ,
0 0.5
0.7 0.2 1 1  1 0  2 / 5 2 / 5 
we can write A =   = SΛ S −1 =   0 0.5 3 / 5 − 2 / 5 .
 0 . 3 0 . 8  1 . 5 − 1  

III. Normalization of eigenvectors

Given that there are an infinite number of eigenvectors associated with each eigenvalue, it is
often the case that a normalized eigenvector is reported, i.e., the one with a length of 1.

Example:
In the last example, for the eigenvalue c = 0.5, we found that any v that satisfies v2 = -v1
would work for an eigenvector. Plugging this last equation into v12 + v22 = 1 (the
normalization making sure length equals 1), we get v12 + (-v1)2 = 1, so 2v12 = 1, and
v1 = 1 / 2 . Plugging this value into
v2 = -v1, we get v2 = - 1 / 2 . The normalized eigenvector associated with c = 0.5 is therefore
 1/ 2 
v c=0.5 =   . By using a similar approach with the other eigenvalue, c = 1, we would
 − 1 / 2 
find
2 / 13   1/ 2  1 1 
v c=1 =   . Note that vc=0.5'vc=0.5 = [ 1 / 2 − 1 / 2 ]   =  +  = [1] and
3 / 13  − 1 / 2   2 2 
2 / 13   4 9 
vc=1'vc=1 =[ 2 / 13 3 / 13 ]   =  +  = [1].
3 / 13  13 13 

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IV. Eigenvalues from symmetric matrices and the concept of orthonormality
*In general, two eigenvectors vi and vj, associated with distinct eigenvalues from a symmetric
matrix are orthogonal to each other, i.e., vi'vj = [0].
*Any set of orthogonal vectors that have length 1 are known as being orthonormal.
*Normalized eigenvectors associated with distinct eigenvalues from a symmetric matrix must be
orthonormal, since they are orthogonal (due to the first statement in above in this section), and
they have length 1 (due to the normalization as in section III).

V. Using eigenvalues to consider second-order optimization conditions

As noted in the previous lecture, with an unconstrained optimization problem, the 2nd-order
condition to determine whether you have a maximum or minimum is based on determining whether
the associated Hessian matrix H is positive definite or negative definite (providing a relative
minimum or relative maximum respectively if the first-order conditions hold). In that lecture
principal minors were used to provide one method to determine if a matrix is positive definite or
negative definite. Another way to determine whether a matrix is positive definite or negative
definite is based on eigenvalues:

1. If all eigenvalues of a matrix are positive, then that matrix is positive definite.
2. If all eigenvalues of a matrix are negative, then that matrix is negative definite.

Example:
In the last lecture we found for z = 3x2 – xy + 2y2 – 4x – 7y +12
the first-order conditions
zx = 6x – y – 4 = 0
zy = -x + 4y – 7 = 0
and solved these simultaneously to find a critical point at x = 1, y = 2.
We also found the Hessian for this problem would be
 z xx z xy   6 − 1
H=  = .
 z yx z yy  − 1 4 
To find the Hessian’s eigenvalues, we find the solutions for c in
6 − c −1
=0
−1 4 − c
(6-c)(4-c) – 1 = 0
24 – 10c + c2 – 1 = 0 → c2 – 10c + 23 = 0 so using the quadratic formula
2
− 10  − 10 
c= − ±   − (23) = 5 ± 2 ,
2  2 
Therefore, the eigenvalues for H are 5 + 2 ≈ 6.414 and 5 − 2 ≈ 3.586 . Since both are
greater than zero, H is a positive definite matrix. The implication is at the critical point
found above, x = 1, y = 2, we must have found a relative minimum for z.