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The asymptotic sampling distribution, after taking plim, of the OLS estimator is given by $\sqrt{N}(\hat{\beta}-\beta) = E[X_iX_i^T]^{-1} \left(1/\sqrt{N} \sum_{I=1}^NX_ie_i \right) $

It must be shown that the asymptotic variance can be written as: $ Var[E[X_iX_i^T]^{-1} 1/\sqrt{N} \sum_{I=1}^NX_ie_i] = \left( E[X_iX_i^T]^{-1} \right) \left( E[X_iX_i^T e_i^2]\right) \left( E[X_i X_i^T]^{-1} \right) $

Because the variance is linear in parameters, my idea was to start like this:

$V[\sqrt{N}(\hat{\beta}-\beta)] = \sqrt{N}Var[\hat{\beta}] + 0$

Because the $Var[\beta]=0$. Thus one could use the fact that $Var[\hat{\beta}]=E[(\hat{\beta}-\beta)(\hat{\beta}-\beta)^T]$.

However, while there seems to be a relationship I stuck at this point, mostly because of the $\sqrt{N}$. Thanks for help.

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  • $\begingroup$ That is unreadable to me. Try using LaTeX surrounded by $ signs. And perhaps also what you have attempted yourself $\endgroup$ – Henry Oct 3 at 0:26
  • $\begingroup$ I'm downvoting this because I don't understand why you're looking at the bias of $\boldsymbol{\hat\beta}$. $\endgroup$ – ahorn Oct 9 at 16:22
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First, $$\sqrt{N}(\hat\beta - \beta) = \left( \frac{1}{N} \sum_{i=1}^N X_i X_i^T \right)^{-1} \frac{1}{\sqrt{N}} \sum_{i=1}^N X_i e_i.$$ (No. You can't take plim.)

Next, apply LLN to the "denominator", and apply CLT to the "numerator". Then, under the assumption that $plim \frac{1}{N} \sum_{i=1}^n X_iX_i^T$ is nonsingular and that $\frac{1}{\sqrt{N}} \sum_{i=1}^N X_i e_i$ converges in distribution to a centered Gaussian distribution, you will be able to show that $$\sqrt{N}(\hat\beta - \beta) \rightarrow N(0, C)$$ for some $C$, where $C$ is called the asymptotic variance of $\sqrt{N}(\hat\beta - \beta)$. (Please derive $C$ yourself for this OLS case using "if $plim A_n = A$ and $b_n \rightarrow N(0,B)$, then $A_n b_n \rightarrow N(0, ABA^T)$.)

Finally, the "asymptotic variance" of $\hat\beta$ is defined as $$AV(\hat\beta) = \frac{1}{N} AV( \sqrt{N}(\hat\beta - \beta)).$$ (This is my definition. Others may define it differently. I don't know yours.) According to this definition, $AV(\hat\beta) = \frac{1}{N} C$. You have already derived $C$ above. Divide it by $N$.

One step further: I don't know how you define asymptotic variances. Depending on the exact definition of $AV$, you may need to remove $\lim$ and $plim$ from $C$ and cancel $N$'s here and there. Some people also mean by $AV(\hat\beta)$ a consistent estimator of $C$ divided by $N$.

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  • $\begingroup$ The question was how to derive $C$. $\endgroup$ – ahorn Oct 9 at 16:17
  • $\begingroup$ Well, if iid, $A = E[X_i X_i^T]^{-1}$ and $B = E[X_i e_i^2 X_i^T]$ as OP writes, and $C=ABA^T$. OP derives $C$ (though a bit clumsy); what OP misses is $AV(\hat\beta)$, I thought. Only OP knows. $\endgroup$ – chan1142 Oct 10 at 5:48
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Note that is it customary in econometrics to put the explanatory variables on the columns of $\boldsymbol X$, and the observations on the rows. The question has switched these around; I will use the notation in the question.

The covariance matrix of $\boldsymbol{{\hat\beta}}$ is $$\sigma^2\cdot \mathrm E_{\boldsymbol X}\left[\left(\boldsymbol {XX^T}\right)^{-1}\right]$$ where an unbiased estimate of $\sigma^2$ is $\frac 1{N-K}\sum_{i=1}^N e_i e_i $. This setting (with the expectation operation used) assumes that $\boldsymbol X$ is stochastic, i.e. that we cannot fix $\boldsymbol X$ in repeated sampling. My point is that this is not a distribution, as claimed in the question. The following is a distribution: $$\sqrt N \left(\boldsymbol{\hat\beta} - \boldsymbol\beta\right) \overset a\sim \mathrm N\left(\ 0\,,\ \ N \sigma^2\cdot \mathrm E_{\boldsymbol X}\left[\left(\boldsymbol {XX^T}\right)^{-1}\right]\right).$$ Note that the above states that $\sqrt N \left(\boldsymbol{\hat\beta} - \boldsymbol\beta\right)$ is asymptotically normally distributed and centred on $0$ (if we didn't multiply by $\sqrt N$, the distribution would converge to a spike, because $\boldsymbol{\hat\beta}$ is consistent).

In your question, you've looked at the bias of $\boldsymbol{\hat\beta}$, which is expected to be $0$. Note that $\sum_{i=1}^N \boldsymbol {x_i}e_i$ is expected to be $0$.

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