Greene 6e Solutions Manual PDF

Preview

Summary

ECONOMETRICS...

Description

Solutions and Applications Manual

Econometric Analysis Sixth Edition

William H. Greene New York University

Prentice Hall, Upper Saddle River, New Jersey 07458

Contents and Notation This book presents solutions to the end of chapter exercises and applications in Econometric Analysis. There are no exercises in the text for Appendices A – E. For the instructor or student who is interested in exercises for this material, I have included a number of them, with solutions, in this book. The various computations in the solutions and exercises are done with the NLOGIT Version 4.0 computer package (Econometric Software, Inc., Plainview New York, www.nlogit.com). In order to control the length of this document, only the solutions and not the questions from the exercises and applications are shown here. In some cases, the numerical solutions for the in text examples shown here differ slightly from the values given in the text. This occurs because in general, the derivative computations in the text are done using the digits shown in the text, which are rounded to a few digits, while the results shown here are based on internal computations by the computer that use all digits. Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Chapter 13 Chapter 14 Chapter 15 Chapter 16 Chapter 17 Chapter 18 Chapter 19 Chapter 20 Chapter 21 Chapter 22 Chapter 23 Chapter 24 Chapter 25 Appendix A Appendix B Appendix C Appendix D Appendix E

Introduction 1 The Classical Multiple Linear Regression Model 2 Least Squares 3 Statistical Properties of the Least Squares Estimator 10 Inference and Prediction 19 Functional Form and Structural Change 30 Specification Analysis and Model Selection 40 The Generalized Regression Model and Heteroscedasticity 44 Models for Panel Data 54 Systems of Regression Equations 67 Nonlinear Regressions and Nonlinear Least Squares 80 Instrumental Variables Estimation 85 Simultaneous-Equations Models 90 Estimation Frameworks in Econometrics 97 Minimum Distance Estimation and The Generalized Method of Moments 102 Maximum Likelihood Estimation 105 Simulation Based Estimation and Inference 117 Bayesian Estimation and Inference 120 Serial Correlation 122 Models with Lagged Variables 128 Time-Series Models 131 Nonstationary Data 132 Models for Discrete Choice 136 Truncation, Censoring and Sample Selection 142 Models for Event Counts and Duration 147 Matrix Algebra 155 Probability and Distribution Theory 162 Estimation and Inference 172 Large Sample Distribution Theory 183 Computation and Optimization 184

In the solutions, we denote: • scalar values with italic, lower case letters, as in a, • column vectors with boldface lower case letters, as in b, • row vectors as transposed column vectors, as in b′′, • matrices with boldface upper case letters, as in M or Σ, • single population parameters with Greek letters, as in θ, • sample estimates of parameters with Roman letters, as in b as an estimate of β,

ˆ or βˆ , • sample estimates of population parameters with a caret, as in α • cross section observations with subscript i, as in yi, time series observations with subscript t, as in zt and panel data observations with xit or xi,t-1 when the comma is needed to remove ambiguity. Observations that are vectors are denoted likewise, for example, xit to denote a column vector of observations. These are consistent with the notation used in the text.

Chapter 1 Introduction There are no exercises or applications in Chapter 1.

Chapter 2 The Classical Multiple Linear Regression Model There are no exercises or applications in Chapter 2.

2

Chapter 3 Least Squares Exercises  1 x1 

1. Let X   ... ...  .

   1 xn 

(a) The normal equations are given by (3-12), X'e  0 (we drop the minus sign), hence for each of the columns of X, xk, we know that xk′e = 0. This implies that Σ ni1e i  0 and Σ ni1 x iei  0 . (b) Use Σ ni1 ei to conclude from the first normal equation that a  y  bx . n n n (c) We know that Σ i1e i  0 and Σ i1 x iei  0 . It follows then that Σ i1 ( xi  x ) ei  0 because

Σ ni1 xei  x Σ in1ei  0 . Substitute ei to obtain Σ ni1 ( xi  x )( yi  a  bxi )  0 or Σ ni 1 (xi  x )( yi  y  b ( xi  x ))  0 Σ i 1 ( xi  x )( yi  y ) . Σni1( x i  x ) 2 (d) The first derivative vector of e′e is -2X′′e. (The normal equations.) The second derivative matrix is 2(e′′e)/bb′′ = 2X′′X. We need to show that this matrix is positive definite. The diagonal elements are 2n and 2Σni 1xi2 which are clearly both positive. The determinant is (2n)( 2Σin1x i2 )-( 2Σin1 xi )2 n

Then, Σ ni 1 (x i  x )(y i  y )  bΣ in1 (xi  x )(xi  x )) so b 

= 4nΣin1 xi2 -4( nx )2 = 4 n[( Σni 1 xi2 )  nx 2]  4 n[( Σin1 ( xi  x) 2 ] . Note that a much simpler proof appears after (3-6). 2. Write c as b + (c - b). Then, the sum of squared residuals based on c is (y - Xc)′′(y - Xc) = [y - X(b + (c - b))] ′[y - X(b + (c - b))] = [(y - Xb) + X(c - b)] ′[(y - Xb) + X(c - b)] = (y - Xb) ′(y - Xb) + (c - b) ′X′′X(c - b) + 2(c - b) ′X′′(y - Xb). But, the third term is zero, as 2(c - b) ′X′′(y - Xb) = 2(c - b)X′′e = 0. Therefore, (y - Xc) ′(y - Xc) = e′e + (c - b) ′X′′X(c - b) or (y - Xc) ′(y - Xc) - e′e = (c - b) ′X′X(c - b). The right hand side can be written as d′′d where d = X(c - b), so it is necessarily positive. This confirms what we knew at the outset, least squares is least squares. 3. The residual vector in the regression of y on X is MXy = [I - X(X′′X)-1X′]y. The residual vector in the regression of y on Z is MZy = [I - Z(Z′′Z)-1Z′′]y = [I - XP((XP)′′(XP))-1(XP)′′)y = [I - XPP-1(X′′X)-1(P′)-1P′X′′)y = MX y Since the residual vectors are identical, the fits must be as well. Changing the units of measurement of the regressors is equivalent to postmultiplying by a diagonal P matrix whose kth diagonal element is the scale factor to be applied to the kth variable (1 if it is to be unchanged). It follows from the result above that this will not change the fit of the regression. 4. In the regression of y on i and X, the coefficients on X are b = (X′′M0X)-1X′′M0y. M0 = I - i(i′i)-1i′ is the matrix which transforms observations into deviations from their column means. Since M0 is idempotent and symmetric we may also write the preceding as [(X′′M0′)(M0X)]-1(X′′M0′)(M0y) which implies that the

3

regression of M0y on M0X produces the least squares slopes. If only X is transformed to deviations, we would compute [(X′′M0′)(M0X)]-1(X′′M0′)y but, of course, this is identical. However, if only y is transformed, the result is (X′′X)-1X′′M0y which is likely to be quite different. 5. What is the result of the matrix product M1M where M1 is defined in (3-19) and M is defined in (3-14)? M1M = (I - X1(X1′X1)-1X1′)(I - X(X′′X)-1X′′) = M - X1(X1′X1)-1X1′M There is no need to multiply out the second term. Each column of MX1 is the vector of residuals in the regression of the corresponding column of X1 on all of the columns in X. Since that x is one of the columns in X, this regression provides a perfect fit, so the residuals are zero. Thus, MX1 is a matrix of zeroes which implies that M1M = M. 6. The original X matrix has n rows. We add an additional row, xs′. The new y vector likewise has an X n   yn  additional element. Thus, Xn ,s    and yn ,s    . The new coefficient vector is ′ x  s  y s bn,s = (Xn,s′ Xn,s)-1(Xn,s′yn,s). The matrix is Xn,s′Xn,s = Xn′Xn + xsxs′. To invert this, use (A -66); 1 (X n′ , s X n, s ) 1  (X ′nX n ) 1  (X ′nX n ) 1 x sx ′s (X ′nX n ) 1 . The vector is 1  xs′( Xn′ Xn) 1 x s (Xn,s′yn,s) = (Xn′yn) + xsys. Multiply out the four terms to get (Xn,s′ Xn,s)-1(Xn,s′yn,s) = 1 1 (Xn′ Xn )1x s x s′bn + ( Xn′ Xn ) 1 xsys  ( Xn′ Xn )  1 xs x s′( X n′ X n )  1 xsys bn – 1  x′s( Xn′ Xn) 1 xs 1  x s′(X n′X n ) 1x s = bn + ( X′n Xn ) 1 xsys –

1 1 xs′ ( Xn′ Xn )  xs  (Xn′ Xn )1 x s x ′s bn ( X′n X n ) 1 x s y s –  1  x s′(X n′X n) 1 x s 1  xs′ (Xn′ Xn ) 1 xs

1  x ′( X ′ X ) x  1 1 bn + 1  s n n 1 s  ( Xn′ Xn ) 1 xs ys – (X′n Xn ) x s x′s bn ′ ′ 1  x′s (Xn′ Xn ) 1 xs  1  x s (X nX n ) x s  1 1 bn + (X ′nX n ) 1x s y s – (X ′nX n ) 1x sx ′sb n 1 1 1 xs′ (Xn′ Xn ) xs 1 x′s (Xn′ Xn )  xs

bn +

1 (X ′nX n ) 1x s ( y s  x ′sb n ) 1 x′s (Xn′ Xn )1 xs

0 yo   i x 0  7. Define the data matrix as follows: X      X1, 1   X 1 X 2 and y   y  . (The subscripts 1 0 1      m on the parts of y refer to the “observed” and “missing” rows of X. We will use Frish-Waugh to obtain the first two columns of the least squares coefficient vector. b1=(X1′M2X1)-1(X1′M2y). Multiplying it out, we find that M2 = an identity matrix save for the last diagonal element that is equal to 0.  0 0 X1′M2X1 = X′1X1  X′1   X1 . This just drops the last observation. X1′M2y is computed likewise. Thus, 0′ 1  the coeffients on the first two columns are the same as if y0 had been linearly regressed on X1. The denomonator of R2 is different for the two cases (drop the observation or keep it with zero fill and the dummy variable). For the first strategy, the mean of the n-1 observations should be different from the mean of the full n unless the last observation happens to equal the mean of the first n-1. For the second strategy, replacing the missing value with the mean of the other n-1 observations, we can deduce the new slope vector logically. Using Frisch-Waugh, we can replace the column of x’s with deviations from the means, which then turns the last observation to zero. Thus, once again, the coefficient on the x equals what it is using the earlier strategy. The constant term will be the same as well.

4

8. For convenience, reorder the variables so that X = [i, Pd, Pn, Ps, Y]. The three dependent variables are Ed, En, and Es, and Y = Ed + En + Es. The coefficient vectors are b d = (X′′X)-1X′′Ed, bn = (X′′X)-1X′′En, and bs = (X′′X)-1X′′Es. The sum of the three vectors is b = (X′′X)-1X′[Ed + En + Es] = (X′′X)-1X′Y. Now, Y is the last column of X, so the preceding sum is the vector of least squares coefficients in the regression of the last column of X on all of the columns of X, including the last. Of course, we get a perfect fit. In addition, X′′[Ed + En + Es] is the last column of X′′X, so the matrix product is equal to the last column of an identity matrix. Thus, the sum of the coefficients on all variables except income is 0, while that on income is 1. 2

2

9. Let R K denote the adjusted R2 in the full regression on K variables including xk, and let R1 denote the adjusted R2 in the short regression on K-1 variables when xk is omitted. Let RK2 and R12 denote their unadjusted counterparts. Then, 2 RK = 1 - e′′e/y′M0y R12 = 1 - e1′e1/y′M0y

where e′′e is the sum of squared residuals in the full regression, e1′e1 is the (larger) sum of squared residuals in the regression which omits xk, and y′′M0y = Σi (yi - y )2 Then,

2

R K = 1 - [(n-1)/(n-K)](1 - R2K ) 2

and R1 = 1 - [(n-1)/(n-(K-1))](1 - R12 ). The difference is the change in the adjusted R2 when xk is added to the regression, 2

2

R K - R1 = [(n-1)/(n-K+1)][e1′e1/y′M0y] - [(n-1)/(n-K)][e′e/y′M0y]. The difference is positive if and only if the ratio is greater than 1. After cancelling terms, we require for the adjusted R2 to increase that e1′e1/(n-K+1)]/[(n-K)/e′′e] > 1. From the previous problem, we have that e1′e1 = e′′e + bK2(xk′M1xk), where M1 is defined above and bk is the least squares coefficient in the full regression of y on X1 and xk. Making the substitution, we require [(e′′e + bK 2(xk′M1xk))(n-K)]/[(n-K)e′′e + e′e] > 1. Since e′′e = (n-K)s2, this simplifies to [e′′e + bK2(xk′M1xk)]/[e′e + s2] > 1. Since all terms are positive, the fraction is greater than one if and only bK2(xk′M1xk) > s2 or bK 2(xk′M1xk/s2) > 1. The denominator is the estimated variance of bk, so the result is proved.

10. This R2 must be lower. The sum of squares associated with the coefficient vector which omits the constant term must be higher than the one which includes it. We can write the coefficient vector in the regression without a constant as c = (0,b*) where b* = (W′′W)-1W′y, with W being the other K-1 columns of X. Then, the result of the previous exercise applies directly. 11. We use the notation ‘Var[.]’ and ‘Cov[.]’ to indicate the sample variances and covariances. Our information is Var[N] = 1, Var[D] = 1, Var[Y] = 1. Since C = N + D, Var[C] = Var[N] + Var[D] + 2Cov[N,D] = 2(1 + Cov[N,D]). From the regressions, we have Cov[C,Y]/Var[Y] = Cov[C,Y] = .8. But, Cov[C,Y] = Cov[N,Y] + Cov[D,Y]. Also, Cov[C,N]/Var[N] = Cov[C,N] = .5, but, Cov[C,N] = Var[N] + Cov[N,D] = 1 + Cov[N,D], so Cov[N,D] = -.5, so that Var[C] = 2(1 + -.5) = 1. And, Cov[D,Y]/Var[Y] = Cov[D,Y] = .4. Since Cov[C,Y] = .8 = Cov[N,Y] + Cov[D,Y], Cov[N,Y] = .4. Finally, Cov[C,D] = Cov[N,D] + Var[D] = -.5 + 1 = .5. Now, in the regression of C on D, the sum of squared residuals is (n-1){Var[C] - (Cov[C,D]/Var[D])2Var[D]}

5

based on the general regression result Σe2 = Σ(yi - y )2 - b2Σ(xi - x )2. All of the necessary figures were obtained above. Inserting these and n-1 = 20 produces a sum of squared residuals of 15. 12. The relevant submatrices to be used in the calculations are Investment Constant GNP Interest

Investment *

Constant 3.0500 15

GNP 3.9926 19.310 25.218

Interest 23.521 111.79 148.98 943.86

The inverse of the lower right 33 block is (X′′X)-1, (X′′X)-1 =

7.5874 -7.41859 .27313

7.84078 -.598953

.06254637

The coefficient vector is b = (X′′X)-1X′y = (-.0727985, .235622, -.00364866)′. The total sum of squares is y′′y = .63652, so we can obtain e′e = y′y - b′X′y. X′y is given in the top row of the matrix. Making the substitution, we obtain e′′e = .63652 - .63291 = .00361. To compute R2, we require Σi (xi - y )2 = .63652 - 15(3.05/15)2 = .01635333, so R2 = 1 - .00361/.0163533 = .77925. 13. The results cannot be correct. Since log S/N = log S/Y + log Y/N by simple, exact algebra, the same result must apply to the least squares regression results. That means that the second equation estimated must equal the first one plus log Y/N. Looking at the equations, that means that all of the coefficients would have to be identical save for the second, which would have to equal its counterpart in the first equation, plus 1. Therefore, the results cannot be correct. In an exchange between Leff and Arthur Goldberger that appeared later in the same journal, Leff argued that the difference was simple rounding error. You can see that the results in the second equation resemble those in the first, but not enough so that the explanation is credible. Further discussion about the data themselves appeared in subsequent idscussion. [See Goldberger (1973) and Leff (1973).] 14. A proof of Theorem 3.1 provides a general statement of the observation made after (3-8). The counterpart for a multiple regression to the normal equations preceding (3-7) is b1 n  b2Σ i xi 2  b3Σ i xi 3  ...  bK Σ i xiK  Σi yi b1Σ i xi2  b2 Σ i xi22  b3 Σ i xi 2 xi 3 ...

 ...  bK Σi xi 2 xiK  Σi xi 2 yi

b1Σ i xiK  b2 Σ i xiK xi 2  b3 Σi xiK xi 3  ...  bK Σi xiK2  Σi xi K y i . As before, divide the first equation by n, and manipulate to obtain the solution for the constant term, b1  y  b2 x2  ...  bK xK . Substitute this into the equations above, and rearrange once again to obtain the equations for the slopes,

b2 Σi ( xi 2  x2 )2  b3 Σi ( xi 2  x2 )( xi 3  x3) ...  bK Σi ( xi 2  x2)( xiK  xK )  Σi ( xi 2  x2)( yi  y) b2 Σi ( xi3  x3 )( xi 2  x2 )  b3 Σi ( xi 3  x3) 2 ...  bK Σi ( xi 3  x3)( xiK  xK )  Σi ( xi 3  x3)( yi  y) ... b2 Σi ( xiK  xK )( xi 2  x2 )  b3 Σi ( xiK  xK )( xi 3  x3) ...  bK Σi ( xiK  xK )2

 Σi ( xiK  xK )( yi  y ). If the variables are uncorrelated, then all cross product terms of the form Σi( xij  x j )( xik  xk ) will equal zero. This leaves the solution, b2 Σi ( xi 2  x 2) 2  Σi ( xi 2  x 2)( yi  y ) b3Σ i ( xi 3  x 3) 2  Σ i ( xi 3  x 3)( yi  y ) ... bK Σi (xiK  xK )2  Σi (xiK  xK )( yi  y ),

which can be solved one equation at a time for bk  Σi ( xik  xk )( yi  y)  Σi ( xik  xk ) 2  , k = 2,...,K.

6

Each of these is the slope coefficient in the simple of y on the respective variable.

Application ?======================================================================= ? Chapter 3 Application 1 ?======================================================================= Read $ (Data appear in the text.) Namelist ; X1 = one,educ,exp,ability$ Namelist ; X2 = mothered,fathered,sibs$ ?======================================================================= ? a. ?======================================================================= Regress ; Lhs = wage ; Rhs = x1$ +----------------------------------------------------+ | Ordinary least squares regres sion | | LHS=WAGE Mean = 2.059333 | | Standard deviation = .2583869 | | WTS=none Number of observs. = 15 | | Model size Parameters = 4 | | Degrees of freedom = 11 | | Residuals Sum of squares = .7633163 | | Standard error of e = .2634244 | | Fit R-squared = .1833511 | | Adjusted R-squared = -.3937136E-01 | | Model test F[ 3, 11] (prob) = .82 (.5080) | +----------------------------------------------------+ +--------+--------------+----------------+--------+-------+----------+ >t]| Mean of X| |Variable| Coefficient | Standard Error |t-ratio |P[|T| +--------+--------------+----------------+--------+--------+----------+ Constant| 1.66364000 .61855318 2.690 .0210 EDUC | .01453897 .04902149 .297 .7723 12.8666667 EXP | .07103002 .04803415 1.479 .1673 2.80000000 ABILITY | .02661537 .09911731 .269 .7933 .36600000 ?======================================================================= ? b. ?======================================================================= Regress ; Lhs = wage ; Rhs = x1,x2$ +----------------------------------------------------+ | Ordinary least squares regressio n | | LHS=WAGE Mean = 2.059333 | | Standard deviation = .2583869 | | WTS=none Number of observs. = 15 | | Model size Parameters = 7 | | Degrees of freedom = 8 | | Residuals Sum of squares = .4522662 | | Standard error of e = .2377673 | | Fit R-squared = .5161341 | | Adjusted R-squared = .1532347 | | Model test F[ 6, 8] (prob) = 1.42 (.3140) | +----------------------------------------------------+ ---+----------+ +--------+--------------+----------------+--------+---->t]| Mean of X| |Variable| Coefficient | Standard Error |t-ratio |P[|T| +--------+--------------+----------------+--------+--------+----------+ Constant| .04899633 .94880761 .052 .9601 EDUC | .02582213 .04468592 .578 .5793 12.8666667 EXP | .10339125 .04734541 2.184 .0605 2.80000000 ABILITY | .03074355 .12120133 .254 .8062 .36600000 MOTHERED| .10163069 .07017502 1.448 .1856 12.0666667 FATHERED| .00164437 .04464910 .037 .9715 12.6666667 SIBS | .05916922 .06901801 .857 .4162 2.20000000 ?======================================================================= ? c. ?=======================================================================

7

Regress ; Lhs = mothered ; Rhs = x1 ; Res = meds $ Regress ; Lhs = fathered ; Rhs = x1 ; Res = feds $ Regress ; Lhs = sibs ; Rhs = x1 ; Res = sibss $ Namelist ; X2S = meds,feds,sibss $ Matrix ; list ; Mean(X2S) $ Matrix Result has 3 rows and 1 columns. 1 +-------------1| -.1184238D-14 2| .1657933D-14 3| -.5921189D-16 The means are (essentially) zero. The sums must be zero, as these new variables are orthogonal to the columns of X1. The first column in X1 is a column of ones, so this means that these residuals must sum to zero. ?======================================================================= ? d. ?======================================================================= Namelist ; X = X1,X2 $ Matrix ; i = init(n,1,1) $ Mat...