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Econometrics: Problem Set 2: Professor: Mauricio Sarrias

1. This document provides an economics homework assignment on econometrics from Universidad Católica del Norte. 2. The homework contains 6 questions covering topics such as biased estimators, omitted variable bias, hypothesis testing, restricted regression, and the Chow test. 3. Students are asked to describe procedures for testing hypotheses, show mathematical proofs regarding restricted regression and variance estimators, and explain how to test whether coefficients are equal across data groups.

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172 views3 pages

Econometrics: Problem Set 2: Professor: Mauricio Sarrias

1. This document provides an economics homework assignment on econometrics from Universidad Católica del Norte. 2. The homework contains 6 questions covering topics such as biased estimators, omitted variable bias, hypothesis testing, restricted regression, and the Chow test. 3. Students are asked to describe procedures for testing hypotheses, show mathematical proofs regarding restricted regression and variance estimators, and explain how to test whether coefficients are equal across data groups.

Uploaded by

pcr123
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Universidad Católica del Norte, Economic Department

Econometrics: Problem Set 2

Professor: Mauricio Sarrias


First Semester 2020

This homework is due on 11th, May at 18:00 hrs. Please, write your answers clearly.

1 Theory
1. (Unbiased or biased estimator) Consider the linear model:

yi = x i β + " i
E("i |xi ) = 0
with n observations and xi is scalar (real-values). Consider the estimator:
"n
! x3i yi
β = "i=1
n 4 (1.1)
i=1 xi

a) Is the estimator unbiased?


b) What is the variance of the estimator?
c) What you can say about the Gauss-Markov theorem and the above results?

2. (Error variance estimator with omitted variables) Assume the following model

yi = x′1i β10 + x′2i β20 + "i


E("i |X) = 0 (1.2)
E("2i |X) = σ02

1
where X = (x1i , x2i ), with x1i k1 × 1 and x2i k2 × 1. Consider the regression

yi = x′1i β1 + "i (1.3)

and define the error variance estimator

n
2 1 # 2
! =
σ !
"i (1.4)
n − k1
i=1

Find E(!
σ 2 |X).

3. (Different ways of testing restrictions): Consider the linear regression model:

yi = β1 + β2 xi2 + β3 xi3 + "i (1.5)

Explain how you could estimate this model subject to the restriction that β2 +β3 =
1 by running a regression that imposes the restriction. Also, explain how you
could estimate the unrestricted model in such a way that the value of one of the
coefficients would be zero if the restriction held exactly for your data.

4. (Hypothesis Testing): Assume you have a random sample from the model:

yi = β1 xi + β2 x2i + "i
(1.6)
E("i |xi ) = 0

where yi is wages measured as chilean pesos per hour, and xi is age. Describe how
you test the hypothesis that the expected wage for a 40-year-old worker is $20 an
hour. You do not need to derive the theory behind your procedure.

5. (Restricted regression and F ratio) We derive the F test in class. However, there
is a convenient alternative formula involving two different sum of squared residuals
that you probably learned in your introductory class of Econometrics : one is SSR,
the minimized sum of squared residuals denoted as SSRU , and the other is the
restricted sum of squared residuals, denoted SSRR , obtained from:

$ st Rβ$ = r
min SSR(β)
β

Finding the β$ that achieves this constrained minimization is called the restricted
regression or restricted least squared. In this exercise I ask you to show that
the F -ratio you learned in class equals:

(SSRR − SSRU )/#r


F =
SSRU /(n − K)

2
In the restricted least squares, the sum of squared residuals is minimized subject
to the constraint implied by the null hypothesis Rβ0 = r. Form the Lagrangian
as:

1% &′ % & % &


L= y − X β$ y − X β$ + λ′ Rβ$ − r ,
2
where λ here is the #r-dimensional vector of Lagrange multipliers (recall: R is
#r×K, β$ is K ×1, and r is #r×1). Let β$ be the restricted least squares estimator
of β. It is the solution to the constrained minimization problem.
a) Let β! be the unrestricted OLS estimator. Show:
' (−1 ′ ) ' ′ (−1 ′ *−1 % &
β$ = β! − X ′ X R R XX R Rβ! − r
) ' (−1 ′ *−1 % & .
λ = R X ′X R Rβ! − r

b) Show that Rβ̃ = 0.


% &
c) Find Var β̃|X .

d) Give and expression for a valid standard error for the elements of β̃.
$ the residuals from the restricted regression. Show:
e) Let ε$ ≡ y − X β,

' (
SSRR − SSRU = (β! − β)
$ ′ X ′ X (β! − β)
$ = ε$′ P ε$.

where P is the projection matrix. (Hint: Add and subtract X(β! − β)


$ to
$
ε$ ≡ y − X β).
f) Verify that you have proved that both F -ratios are equal.

6. (Chow Test) Assume that you are interested in whether the coefficients of one
group of the data (women, for example) are equal to those of other group (men).
For instance, consider the following regressions

yi = x′i β + "i for all observations


yi1 = x′i1 β1 + "i1 for n1 observations (group 1) (1.7)
yi2 = x′i2 β2 + "i2 for n2 observations (group 2)

Explain how you would test H0 = β1 = β2 . (Hint: Use the F test you derived
in previous question and think that the pooled model (model 1) is the restricted
model, whereas allowing different coefficients for each group is the unrestricted
model. )

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