APEC 8212 Econometric Analysis II Spring 2010 Homework 1 Answer Key Due Wednesday, February 3 Question 1 Let and

nd be scalars, such that: E | = + +

where

a. Find E | /

=E

, and comment on how it depends on . E | = +2

As we can see, the marginal effect of on E | is linear function of . If is positive, then the marginal effect will be higher than , as long as is above its mean. If is negative and is above its mean, the marginal effect will be negative. b. Show that is equal to E | / averaged across the distribution of . over the distribution of , we obtain: E | = = | = +2 | | = |

Taking the expectation of E | /

+2 +2 = +2

E |

c. Suppose that has a symmetric distribution, so that E = 0. Show that L |1, = + . Therefore, the coefficient on in the linear projection of on 1, measures something useful in the nonlinear model for E | : it is the partial effect E | / averaged across the distribution of . Applying property LP.5. we obtain: L |1, = E | |1, L |1, Now, notice that: = = on : + + + |1, = + |1,

Define the linear projection of

|1,

. Then we have:

E Cov ,

=E

=E

E E

From the definition of a covariance, we know:

Since E

= E

Cov E

= 0: ,

=E + ,

=0 =0 =

Then: E = and = Cov = Cov +

And since

is a constant:

We can then conclude that

L |1, which is the desired result. Question 2

are uncorrelated, so that

= 0. It then follows that:

For random scalars and and a random vector , suppose that E | , is a linear function of , and that and each have zero mean and are uncorrelated with the elements of . Show that E | , = E | = for some . Since, by assumption, E | , is a linear function of E | , = + , : +

In this context, we want to show that = , = . To do so, consider property LP.7. According to this property, can obtained by first taking the linear projection of = 1, on , and calculating the population residual, : = Then the next step is to project onto , so that: | = |

However, since by assumption has zero mean and is uncorrelated with , in the first step and then = . Then we have: | = | =

= ,

Given the fact that has zero mean and is uncorrelated with x, that = , = , which is the desired result. Question 3 Let be a 1 random vector, and let = + , where E = 0 and E = 0 and E = . E a. Show that L |1, = +

= . With

, we conclude

be a random scalar. Suppose that can be expressed as = . Define = + + + + , where

+ + =L

Apply property LP.3, which says that the linear projection is a linear operator: L |1, |1, + L |1, =L

where the last inequality follows because L |1, = . Since, L |1, = + + + E L |1, =

= 0, given the assumptions that E , then: + +

|1,

= 0 and

which is desired result. b. Find the projection error L |1, in terms of

and .

L |1, + L |1, + L |1, [from part a)] L |1, + +

Question 4 Let = = / , be a -asymptotically normal estimator for be an estimator of = / . = . , = = b. Find Avar in terms of and Avar = / = , , with 0. Let

a. Show that plim Since the function Slutskys theorem:

is continuous at all points in where / = / = / =

0, we can apply

using the delta method. Avar ; where is the matrix of first

Applying the delta method, Avar derivatives of , . Then:

Avar

= =

Avar

Avar

1 0.4 , find the 0.4 2

c. If for a sample of data, asymptotic standard error of . With = 1.5, 0.5

= 1.5, 0.5 = ,
.

and Avar

is estimated as

= 2,6 1 0.4 0.4 2 2 8.15 6

2 6