IMRAN ARIF ECONOMETRICS 2 EXAM 2

1

1)
jt jt j t jt
y x v o | = + + + +
For t=4
1
1
1
2 2
2
3 3 3
4 4
4
1
1
1
1
j
j
j j
j
j j
j
j
y
x
y x
Z Z V
y x
x
y

| |
| |
| |
|
|
|
| | |
|
|
= + + +
|
|
|
|
\ .
|
|
|
|
|
|
\ .
\ .
\ .

We can write it in vector form as
y w Z Z v

o = + + +
Here
1
2
3
4
j
j
j
j
y
y
y
y
y
| |
|
|
=
|
|
|
\ .
,
1
2
3
4
1
1
1
1
j
j
j
j
x
x
w
x
x
| |
|
|
=
|
|
|
\ .
,
o
o
|
| |
=
|
\ .
,
1
2
3
4

| |
|
|
=
|
|
|
\ .

4 1
4 1 4 1 4 4
4 4
Nx
Nx Nx Nx N
Nx N
y w Z Z v

o = + + +
Now for t=4
1 1
2 2
3 3
4 4
4 4 4 1
1 0 0 0
1 1 0 0
1 1 1 0
1 1 1 1
X X
Z Z

| | | | | |
| | |
| | |
=
| | |
| | |
| |
\ . \ . \ .
, Hence
4 4
1 0 0 0
1 1 0 0
1 1 1 0
1 1 1 1
X
Z

| |
|
|
=
|
|
\ .

In general when t=T and N countries.
( )
1 0 0 0
1 1 0 0
1 1 0
0
1 1 1 1
NTXNT
Z

| |
|
|
| =
|
|
|
\ .

is the cumulative time effect of period t.

IMRAN ARIF ECONOMETRICS 2 EXAM 2
2

2)
j
TXT
VAR u ( = O


Where
TXT
O is a Variance-Covariance matrix.
( ) ( ) ( )
2 T T T T T
j j v T
TXT
E u u Z E uu Z Z E Z I

o O = = + +
If we assume that , ,
j t jt
v are identically and independently distributed i.e. Covariance between them
is zero, then
( )
2 2 2 T
T v T
TXT
j Z Z I

o o o O = + +
2 2 2 2 2 2 2 2 2
2 2 2 2 2 2 2 2 2
2 2 2 2 2 2
2 2 2 2 2 2 2 2 2
( ) ( )
0 0 0
2 2 2 0 0 0
2 3 0 0 0
0
2 3 0 0 0
v
v
TXT
v
TXT TXT
T




o o o o o o o o o
o o o o o o o o o
o o o o o o
o o o o o o o o o
| | | | |
| |
| |
| |
O = + +
| |
| |
| |
\ . \ \ .
( ) TXT
|
|
|
|
|
|
|
.

2 2 2 2 2 2 2
2 2 2 2 2 2 2
2 2 2 2 2 2 2
( )
2
v
v
TXT
v
TXT
T



o o o o o o o
o o o o o o o
o o o o o o o
| | + + + +
|
+ + + +
|
O =
|
|
|
+ + + +
\ .

For N=1 and t=4. We can write the above matrix as
2 2 2 2 2 2 2 2 2
2 2 2 2 2 2 2 2 2
2 2 2 2 2 2 2 2 2
2 2 2 2 2 2 2 2 2
(4 4)
2 2 2
2 3 3
2 3 4
v
v
TXT
v
v
X




o o o o o o o o o
o o o o o o o o o
o o o o o o o o o
o o o o o o o o o
| | + + + + +
|
+ + + + +
|
O =
|
+ + + + +
|
|
+ + + + +
\ .


IMRAN ARIF ECONOMETRICS 2 EXAM 2
3

3)
| |
1 1 1
( ) ( ) ( )
T T T T T
OLS
y w
w w w y w w w w w w
o
o o
.

= +
= = + =
T
w w
| |
| |
1
1
1
1
( )
( )
( )
( )
T T
T T
OLS
T T
OLS
T T
OLS
w w w
w w w
E E E w w w
E w w w Z Z E v

o
o o
o o
o o

+
= +
(
( = +
(

(
( = + +
(


Since
| | 0 E v =
Thus OLS E o o
.
(
=
(


Now
| |
1
1 1
2 1
( )
0 ( ) ( )
( )
T T
OLS
T T T T
OLS
T
OLS
u
VAR VAR VAR w w w
VAR E w w w uu w w
VAR w w
o o
o
o o
.

.

.

(
( = +
(

(
( = +
(

(
=
(


( )
2 2 2 1
( )
T
OLS
v
VAR w w

o o o o
.
(
= + +
(


IMRAN ARIF ECONOMETRICS 2 EXAM 2
4

4)
( )
( )
1 2
2 1 3 2 1
, , ,
, , ,
T
j j j jT
T
j j j j j jT jT
y y y y
y y y y y y y

=
A =

For T=4
( )
1 1
2 1 2 1
2 2
3 2 3 2 1 2
3 3
4 3 4 3
4 4
1 2 1 2
j j
j j j j
j j
j j j j j j j
j j
j j j j
j j
j j j j j
y y
y y y y
y y
y y y y y y y M M
y y
y y y y
y y
y M y M y y M M y
( (
( ( (
( (
( ( (
( (
A = A = A =
( ( (
( (
( ( (
( (

( (

A = A =

Here
1
0 1 0 0
0 0 1 0
0 0 0 1
M
(
(
=
(
(

,
2
1 0 0 0
0 1 0 0
0 0 1 0
M
(
(
=
(
(


Thus
0 1 2
0 1 0 0 1 0 0 0 1 1 0 0
0 0 1 0 0 1 0 0 0 1 1 0
0 0 0 1 0 0 1 0 0 0 1 1
Z M M
( ( (
( ( (
= = =
( ( (
( ( (


0 j j
Z y y = A , Hence for general case
0 1 2
0 1 0 0 0 0 1 0 0 0 0 0
0 0 1 0 0 0 0 1 0 0 0 0
0 0 0 1 0 0 0 0 1 0 0 0
0 0 0 0 1 0 0 0 0 1 0 0
0 0
0 0 0 0 0 0 1 0 0 0 0 0 1 0
Z M M
( (
( (
( (
( (
= =
( (
( (
( (
( (


0
1 1 0 0 0 0
0 1 1 0 0 0
0 0 1 1 0 0
0 0 0 1 1 0
0
0 0 0 0 0 1 1
Z
(
(

(
(
=
(

(
(
(

IMRAN ARIF ECONOMETRICS 2 EXAM 2
5

5)
( ) ( ) ( )
1
2 2
1
1 1
T T
jt jt jt jt j jt jt j jt
t t
VAR y E y E y E X v X v o | o |

= =
( | | | |
(
(
A = A A + + + + + + + +
( | |
(

\ . \ .

( ) ( ) ( )
( ) ( ) ( ) ( ) ( ) ( ) ( )
2 2
2 2 2 2
2 2
jt jt t jt jt t jt
jt jt t jt jt t jt
VAR y E x v E x v
VAR y E x E E v E x E E v
| |
| |
(
(
A = A + + A A + + A
(

( (
(
A = A + + A A A
( (


Since ( )
2
0
t
E = ,
( )
2
0
jt
E v A = , ( )
2
2
t
E

o
(
=

,
( )
2
2
2
jt v
E v o
(
A =
(

Thus
( ) ( )
2 2 2
2
jt jt v
VAR y VAR x

| o o
(
A = A + +



( ) ( ) ( ) ( )
T T
j j j j j
VAR y E y y E y E y A = A A A A
Since
( )
jt j j
VAR y x v | A = A + +A
( ) ( ) ( ) ( )
T
j j j
VAR y VAR x VAR VAR v | | A = A + + A
( ) ( )
2 2
0 0
T T
j j T v
VAR y VAR x I Z Z

| | o o ( A = A + +