Intro.

Econometric Theory (Fall 08/09)

1-1

Nese Yildiz

Problem Set 5 - Solution

1. (Ch. 6 Ex.1) If we regress CY on X1 only we get
 T 1 T
 T 1 T
 T 1 T
X
X
X
X
X
X
X
X
X1 X1
X1 e
1
1
1
2
1
1
1
1
1 =
1 +
2 +
n
n
n
n
n
n
P

1 + [E(x1i xT1i )]1 E(xT1i x2i )2 .

So this procedure will not yield a consistent estimator for 1 unless x1 is orthogonal
to x2 or 2 = 0.
2. (Ch. 6 Ex. 2) Rewrite
=

n
X
xi xT
i

i=1

Since

+ Ik
n

!1

n
X
xi y i
i=1

0 as n , this is consistent for .

3. (Ch. 6 Ex. 3) Now depends on n, so we have n . Moreover,

n . Now plim]hat equals [E(xi xTi ) + cIk ]1 E(xi xTi ) 6= .

n
n

c > 0 as

4. (Ch. 6 Ex. 7)
(a) Population linear projection coefficient of y on x equals
[E(xi xTi )]1 E[xi (xTi + ei + ui )] = + [E(xi xTi )]1 [E(xi ei ) + E(xi ui )] = .
(b) Yes.
P
[E(xi xTi )]1 E[xi (xTi +ei +ui )] = +[E(xi xTi )]1 [E(xi ei )+E(xi ui )] = .

(c) We know that E(xi ui ) = E(yi ui ) = 0. From these we get E(ei ui ) = 0. Next,
note that
!1 n
n
T
X xi (ei + ui )
X

x
x
i
i

n( ) =
.
n
n
i=1
i=1
Under the same assumptions given in the paper (the ones which apply to ei
are also assumed to apply ui ), this last expression converges in distribution
to N (0, V ), where V = Qx x1 E[xi xTi (e2i + u2i )]Q1
xx .

Intro. Econometric Theory (Fall 08/09)

1-2

Nese Yildiz

5. (Ch. 6 Ex. 9)
(a) Yes, they are both consistent:
Pn
= + Pi=1
n
1
= +
n

xi ei
P
n

x2i
i=1 n
n
X
ei P
i=1

E(xi ei )
= ,
E(x2i )
 
ei
= .
+E
xi
xi
+

E(x2 e2 )
(b) Asymptotic variance of equals [E(xi2 )]i 2 , and asymptotic variance of equals
i
 2
ei
E x2 . Suppose ei = xi i , with xi independent from i and E(i2 ) < .
i

Then

E(x2i e2i )
[E(x2i )]2

E(x4i )E(i2 )
.
[E(x2i )]2

By Caucy-Schwarz inequality this is larger than

 2
 2
ei
E(x2i e2i )
e
2
2
2
2 1
E(i ) = E x2 . If E(ei |x) = , then [E(x2 )]2 = E(x2 ) , and E xi2 =
i
i
i
r i 
 

 
p

1 
1
2
E x2 . By Cauchy-Schwarz inequality E xi xi  E(x2i ) E x12 .
i

Thus, in this case, asymptotic variance of is the smaller one.