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EC331 Econometrics Homework 3 Guide

This homework assignment on econometrics contains 4 questions: [1] Consider a population model and show properties of expected value and covariance hold given a condition; [2] Derive the ordinary least squares estimators for intercept and slope, show the OLS estimator for slope can be rewritten, and compute its expected value and variance given assumptions; [3] Derive estimators when explanatory variables are multiplied or a constant is added to dependent variables; [4] Show properties that the fitted least squares line passes through sample means and the average of fitted values equals the sample mean of dependent variables. Students are to submit their answers by a deadline to an email address.

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28 views2 pages

EC331 Econometrics Homework 3 Guide

This homework assignment on econometrics contains 4 questions: [1] Consider a population model and show properties of expected value and covariance hold given a condition; [2] Derive the ordinary least squares estimators for intercept and slope, show the OLS estimator for slope can be rewritten, and compute its expected value and variance given assumptions; [3] Derive estimators when explanatory variables are multiplied or a constant is added to dependent variables; [4] Show properties that the fitted least squares line passes through sample means and the average of fitted values equals the sample mean of dependent variables. Students are to submit their answers by a deadline to an email address.

Uploaded by

Tunahan Küçüker
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

EC331 - Econometrics

Homework 3

Please submit the problem set to bouneconometrics@[Link] no later than 17:00 on


Wednesday, 23rd December. Failure to do so will will result in 50% reduction in your assignment
grade. To gain full credit, please attempt all parts of all questions to the best of your ability. You
can work in groups of up to 6 people. Each group should return only 1 assignment with all group
members’ names written on it. Good luck!

1) Consider the population model

y = β0 + β1 x + u.

Show that if E[u|x] = 0 holds, we have that i) E[u] = 0 and ii) cov(x, u) = 0. (Hint: use the
law of iterated expectations). Provide intuition for these results.

2) Suppose that in the population, the dependent variable Y is related to the explanatory variable
X and the unobserved variable ,
Y = α + βX + 
where α and β are the unknown population intercept and the slope coefficient respectively.
You have a random sample of size n, {(Xi , Yi ) : i = 1, . . . , n}, such that realizations of Xi
and Yi for i = 1, . . . , n are not all the same. You seek estimators for α and β.

i) What problem do ordinary least squares estimators α̂ and β̂ solve? State this problem
mathematically.

ii) Derive the first order conditions that α̂ and β̂ satisfy.

iii) The OLS estimator β̂ is given by,


Pn
(Xi − mX )Yi
β̂ = Pi=1
n 2
i=1 (Xi − mX )

Show that β̂ can be rewritten,


Pn
(Xi − mX )i
β̂ = β + Pi=1
n 2
i=1 (Xi − mX )

Hint: Remember ni=1 (Xi − mX ) = 0 and ni=1 (Xi − mX )2 = ni=1 (Xi − mX )Xi .
P P P

iv) Assume that E(|X) = 0. Since {(Xi , Yi ) : i = 1, . . . , n} is a random sample, this implies
that E(|X1 , X2 , . . . , Xn ) = 0 for i = 1, 2, . . . n. Use your answer from (iii) to compute
E(β̂|X1 , . . . , Xn ) under this assumption.

v) Use the law of iterated expectations to show that β̂ is an unbiased estimator for β when
the assumption E(|X) = 0 holds.

1
vi) Assume further that V ar(|X) = σ 2 . Since {(Xi , Yi ) : i = 1, . . . , n} is a random
sample, this implies that V ar(i |X1 , X2 , . . . , Xn ) = σ 2 for i = 1, . . . , n. Compute
V ar(β̂|X1 , . . . , Xn ) under these assumptions.

3) Consider the model,

yi = β0 + β1 xi + ui , i = 1, 2, ..., N.

a) Suppose that we multiply each xi value by a constant such as 3. Will this affect the
residuals and fitted values of y? Derive the estimator for this case. Explain how it differs
from the estimator derived without this condition imposed on.
b) Now suppose that wee add a constant value such as 3 to each yi and regress them on
xi . Derive the estimator for this case. Explain how it differs from the estimator derived
without this condition imposed on.

4) You are given the fitted least squares as

ŷi = β̂1 + β̂2 xi .

a) Mathematically show that the fitted line passes through the means, x̄, ȳ.
b) Mathematically show that the average value of ŷi equals the sample average of y. That
is, show that ŷ¯ = ȳ.

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