null
271 APPENDIX E
SOLUTIONS TO PROBLEMS
E.1 This follows directly from partitioned matrix multiplication in Appendix D. Write
X = 12n ⎛⎫ ⎪ ⎪ ⎪ ⎪ ⎪⎝⎭x x x , X ' = (1'x 2'x n 'x ), and y = 12n ⎛⎫ ⎪ ⎪ ⎪ ⎪ ⎪⎝⎭
y y y
Therefore, X 'X = 1n t t t ='∑x x and X 'y = 1n
t t t ='∑x y . An equivalent expression for ˆβ is
ˆβ = 1
11n t t t n --=⎛⎫' ⎪⎝⎭∑x x 11n t t t n y -=⎛⎫' ⎪⎝⎭
∑x which, when we plug in y t = x t β + u t for each t and do some algebra, can be written as
ˆβ= β + 111n t t t n --=⎛⎫' ⎪⎝⎭∑x x 11n t t t n u -=⎛⎫' ⎪⎝⎭
∑x . As shown in Section E.4, this expression is the basis for the asymptotic analysis of OLS using matrices.
E.2 (i) Following the hint, we have SSR(b ) = (y – Xb )'(y – Xb ) = [ˆu
+ X (ˆβ – b )]'[ ˆu + X (ˆβ – b )] = ˆu 'ˆu + ˆu 'X (ˆβ – b ) + (ˆβ – b )'X 'ˆu + (ˆβ – b )'X 'X (ˆβ – b ). But by the first order conditions for OLS, X 'ˆu
= 0, and so (X 'ˆu )' = ˆu 'X = 0. But then SSR(b ) = ˆu 'ˆu + (ˆβ – b )'X 'X (ˆβ – b ), which is what we wanted to show.
(ii) If X has a rank k then X 'X is positive definite, which implies that (ˆβ
– b ) 'X 'X (ˆβ – b ) > 0 for all b ≠ ˆβ
. The term ˆu 'ˆu does not depend on b , and so SSR(b ) – SSR(ˆβ) = (ˆβ– b ) 'X 'X (ˆβ
– b ) > 0 for b ≠ˆβ.
E.3 (i) We use the placeholder feature of the OLS formulas. By definition, β = (Z 'Z )-1Z 'y =
[(XA )' (XA )]-1(XA )'y = [A '(X 'X )A ]-1A 'X 'y = A -1(X 'X )-1(A ')-1A 'X 'y = A -1(X 'X )-1X 'y = A -1ˆβ
.
(ii) By definition of the fitted values, ˆt y = ˆt x β and t y = t
z β. Plugging z t and β into the second equation gives t y = (x t A )(A -1ˆβ) = ˆt x β = ˆt
y .
(iii) The estimated variance matrix from the regression of y and Z is 2σ(Z 'Z )-1 where 2σ is the error variance estimate from this regression. From part (ii), the fitted values from the two