# Verifying Identification Results for Univariate Regression

So I have this linear regression model shown below and I'm supposed to be showing that equation 3 is equal to equation 4. There's a hint that says a 2x2 inverse matrix appears in the proof, but the inverse of xx' doesn't exist (?)

Am I supposed to be rewriting beta in matrix terms? I'm not sure what I'm supposed to be doing here.

As the first step, we will rewrite the Equation 3 more explicitly. The first term $$E[X'X]$$ can be rewritten as:

Note: The random vector $$X$$ is composed of a constant value of 1 due to interception and a random term $$X_1$$. Since this is the only random variable in the vector, I will use $$X$$ instead of it.

$$\begin{equation*} E[X'X]^{-1}=E\left\{ \begin{bmatrix} 1 & X \\ X & X^2 \end{bmatrix}\right\}^{-1}= \begin{bmatrix} 1 & E[X] \\ E[X] & E[X^2] \end{bmatrix}^{-1}\\[2em]= \frac{1}{E[X^2]-E[X]^2} \begin{bmatrix} E[X^2] & -E[X] \\ -E[X] & 1 \end{bmatrix}\\[2em]=\frac{1}{Var(X)} \begin{bmatrix} E[X^2] & -E[X] \\ -E[X] & 1 \end{bmatrix} \end{equation*}$$

Then, the second term $$E[XY]$$ can be written as:

$$\begin{equation*} E[XY]= E\left\{ \begin{bmatrix} 1 \\ X \end{bmatrix}Y\right\}=\begin{bmatrix} E[Y] \\ E[XY] \end{bmatrix} \end{equation*}$$

Now, we can substitute these matrices into Equation 3. With some algebra, we can easily reach Equation 4.

$$\begin{equation*} \beta=E[X'X]^{-1}E[XY]= \frac{1}{Var(X)} \begin{bmatrix} E[X^2] & -E[X] \\ -E[X] & 1 \end{bmatrix}\begin{bmatrix} E[Y] \\ E[XY] \end{bmatrix}\\[2em]=\frac{1}{Var(X)}\begin{bmatrix} E[X^2]E[Y]-E[X]E[X,Y] \\ E[XY]-E[X]E[Y] \end{bmatrix}\\[2em]=\frac{1}{Var(X)}\begin{bmatrix} E[X^2]E[Y]-E[Y]E[X]^2+E[Y]E[X]^2-E[X]E[X,Y] \\ Cov(X,Y) \end{bmatrix}\\[2em]=\frac{1}{Var(X)}\begin{bmatrix} E[Y]Var(X)-E[Y]Cov(X,Y) \\ Cov(X,Y) \end{bmatrix}=\begin{bmatrix} E[Y]-E[X]\frac{Cov(X,Y)}{Var(X)} \\ \frac{Cov(X,Y)}{Var(X)} \end{bmatrix}=\begin{bmatrix} \beta_0 \\ \beta_1 \end{bmatrix} \end{equation*}$$

• Wow, thank you so much for the quick reply. I really appreciate it. I was just stuck at finding the inverse properly, so I couldn't progress any further. I understand your working. Thanks a lot! – Elisia Hearts May 2 at 18:58