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Consider a linear model

$$y = X\beta + e$$

One can express the estimator for $\beta$ as

$$\hat{\beta} = A^Ty$$

It is stated in Hansen's Econometrics that

$$\mbox{Var} (\hat{\beta}|X) = \mbox{Var} (A^Ty|X) = \mbox{Var} (A^Te|X) = A^T D A$$

where $D$ is variance-covariance matrix with variances of error term on the diagonal and zeros everywhere else. So far I understand that the only step to prove it is simply to take out $A^T$ from $\mbox{Var} (A^Te|X)$ with squaring. But I don't quite understand why this step results into

$$\mbox{Var} (A^Te|X) = A^T \mbox{Var} (e|X)A$$

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  • $\begingroup$ I'd break this into two steps/ideas. (1) Simple vector case. Let $\mathbf{w}$ be some vector. Convince yourself that $\mathrm{Var}\left( \mathbf{w}' \mathbf{e} \right) = \mathbf{w}' \mathrm{Var}\left( \mathbf{e} \right)\mathbf{w} $ (can even write it out as a sum $\sum_{i,j} w_i w_j \Sigma_{ij}$ where $\Sigma = \mathrm{Var}\left( \mathbf{e} \right)$. (2) Write matrix $A =\begin{bmatrix} \mathbf{w}_1 & \mathbf{w}_2 & \ldots & \mathbf{w}_n \end{bmatrix} $ in terms of its column vectors. The matrix case is just an extension of the first, vector case. $\endgroup$ – Matthew Gunn Oct 3 '16 at 16:42
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Note that $$Var(A^Te\vert X) = \mathbb{E}[(A^Te)(A^Te)^T\vert X]$$

Assuming $\mathbb{E}(e)$ is a vector of zeros. So by expanding the above we see that:

$$Var(A^Te\vert X) = \mathbb{E}[(A^Te)(A^Te)^T\vert X] = \mathbb{E}[A^Tee^TA\vert X] = A^T\mathbb{E}[ee^T\vert X]A = A^TDA$$

The second to last equality above holds because $A = [X^TX]^{-1}X^T$ which means we can pull it out of the expectation conditioned on $X$

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