Intro.

Econometric Theory (Fall 06/07)

1-1

Nese Yildiz

Problem Set 3 - Solution

1. (3.2) Let and e denote the OLS coefficients and residuals from regressing Y on X.
Let and e denote the OLS regression coefficients and residuals from regressing
Y on Z.
Z = Z(Z T Z)1 Z T Y = XC(C T X T XC)1 C T XY
= XCC 1 (X T X)1 (C T )1 C T X T Y

= X(X T X)1 X T Y = X .
In addition, e = Y Z = Y X = e.
2. (3.6) OLS coefficient from regressing y on X equals
(X T X)1 X T y = (X T X)1 X T X(X T X)1 X T y

= (X T X)1 X T y = ,
where is the OLS coefficient from regression of Y on X.
3. (3.7) Note
P X = P [X1 X2 ] = X(X T X)1 X T X = X = [X1 X2 ].
Since the equality must hold for each entry this means that P X1 = X1 . Similarly,
M X1 = (In P )X1 = X1 P X1 , which by the first part equals X1 X1 = 0.
4. (3.10) Note that the question assumes that P1 and P2 are well
 Tdefined, which

X1 X 1
0
T
T
T
means that X1 X1 and X2 X2 are both invertible. X X =
,
0
X2T X2
since X1T X2 = 0. Then




(X1T X1 )1
0
X1
P = X 1 X2
0
(X2T X2 )1
X2



(X1T X1 )1 X1T
= X 1 X2
= X1 (X1T X1 )1 X1T + X2 (X2T X2 )1 X2T = P1 + P2 .
(X2T X2 )1 X2T
5. (3.12) The first regression cannot be run. This is because 1 = d1 + d2 . As a result,
the data matrix X does not have full rank, i.e. X T X is not invertible. The other
two regression can be run as they do not suffer from this problem.

Intro. Econometric Theory (Fall 06/07)

1-2

Nese Yildiz

a) Note d1i + d2i = 1, so that yi = d1i 1 + d2i 2 + ei = 1 + d2i (2 1 ) + ei .

Thus, = 1 and = 2 1 .
b) 1T d1 = n1 and 1T d2 = n2 .
c) The answer depends on the definition of e. If e is the population residual from
linear projection of Y on d1 and d2 (or on d1 and the constant, or on d2 and
the constant), then this assumption is automatically satisfied. If e denotes
the structural unobservable, then this assumption has content. For example,
if y denotes wages this assumption would mean that the unobservables in the
wage equation are uncorrelated with gender.
6. (3.13)
a) By construction

Pn

i d1i
i=1 e

= 0. Moreover, d1i d2i = 0 for each i. Therefore,

Pn
Pn
[
1 d21i + 2 d1i d1i + ei d1i ]
i=1 yi d1i
= i=1
n1
n1
Pn

d
1 1i
= 1 .
= Pi=1
n
d
i=1 1i

The argument for 2 is similar.

b) y is the residual vector from regressing y on d1 and d2 , and X denotes the
residuals from regressing X on d1 and d2 .
c) They are the same.
7. (4.4)
a) E(y|X) = (X T 1 X)1 X T 1 X + (X T 1 X)1 X T 1 E(e|X) = .
b) Let A = (X T 1 X)1 X T 1 .

V ar(|X)
= AV ar(y|X)AT
= (X T 1 X)1 X T 1 2 (X T 1 X)1
= 2 (X T 1 X)1
c) y X = y XAy = (I XA)y. SoM1 = I XA, and the claim follows if we
show that M1 X = 0. But, M1 X = X X(X T 1 X)1 X T 1 X = X X =
0.

Intro. Econometric Theory (Fall 06/07)

1-3

Nese Yildiz

d)
M1 1 M1 = M1 [1 1 X(X T 1 X)1 X T 1 ]
= [I 1 X(X T 1 X)1 X T ][1 1 X(X T 1 X)1 X T 1 ]
= 1 21 X(X T 1 X)1 X T 1
+ 1 X(X T 1 X)1 X T 1 X(X T 1 X)1 X T 1
= 1 1 X(X T 1 X)1 X T 1 .
e) By part (c), E(s2 |X) =
using part (d) we have

1
E[
eT 1 e|X]
nK

1
E[eT M1 1 M1 e|X].
nK

Then

E[eT M1 1 M1 e|X] = tr(E[eT M1 1 M1 e|X]) = E[tr(eT M1 1 M1 e)|X]

= E[tr(eeT M1 1 M1 )|X] = tr(E[eeT M1 1 M1 |X])
= 2 tr(M1 1 M1 )
= 2 tr(In X(X T 1 X)1 X T 1 )
= 2 [n tr(X(X T 1 X)1 X T 1 )]
= 2 [n tr(X T 1 X(X T 1 X)1 )]
= 2 [n tr(IK )] = 2 (n K).
Thus, E(s2 |X) = 2 .
f) s2 is an unbiased estimator for 2 .