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so
= (XX)-1Xy
b) Suppose k=2, so y = X11 + X22 +u
and suppose also that
and
Find the OLS estimates of 1 and 2
(5 marks)
so
c)
which if E(uu) = uI
d) How would linear dependence between the X variables affect your answers
to parts a) and c) ?
(6 marks)
Linear dependence (multicolinearity) makes the determinant of theXX matrix zero (if
exact linear dependence/colinearity) or close to zero when the variables are highly
correlated. In which case both the OLS estimate and its estimated variance (standard
errors) will be large, other things equal, and very sensitive.
ii) Bias
Bias: An unbiased estimator is one where the expected (mean) value of an estimator
is equal to true value
A consistent estimator converges toward the true value as the sample size becomes
infinitely large
as N
An asymptotically efficient estimator is one which converges to the true value most
quickly , so for any N it has the smallest variance
Diagrams will help here
b) Show that the instrumental variable (IV) estimator
is a
consistent estimator of in the model y=X +u in the presence of endogeneity
(8 marks)
Hence
since
where xi is the ith row of the X matrix and zi is the ith column of the IV matrix
this term (effectively a sample average) is finite ie will not converge to zero as
sample size increases by assumption
However
c)
Assuming that in the general linear model y=XB = u that
plim(Xu/N) = 0
and
plim(uu/N) = 2u
, where
(9 marks)
so
where M=I-X(XX)-1X
and MX=0
so
and hence
As N
N/(N-k)
And the assumptions of the general linear model are that plim(Xu/N)=0, sp 2nd term
in square brackets is zero
Assuming further that plim(uU/N) = 2u
Then plim(s2)= 2u
2.
a) Give 4 properties of any maximum likelihood estimator
(8 marks)
Consistency
Asymptotic Normality
Asymptotic Efficiency
Invariance if
of g()
is the MLE
Taking logs
so
u~N(0, 2I)
show that the maximum likelihood estimator of B is also the OLS estimator in
this case
(10 marks)
So Likelihood function L() = f(y1, y2,yn; )
Need f(y) rather than f(u) but we know
So L()=
so
= (XX)-1Xy =