ECON 870 Midterm 1 Saraswata Chaudhuri

Fall, 2010 Oct 19, 2010 Stanislav Khrapov

0 0 0
Suppose that the value 0 = (10 , 20 ) of the parameter = (10 , 20 )0 B Rp is defined by
the moment conditions:
E[g(w, )] = 0 = 0 . (1)

0 0
Suppose that you have i.i.d. observations wi = (yi , X1i , X2i ) for i = 1, . . . , n from the sample
space W and the function g(w, ) is defined by

0 0 X1i 0 0
g(wi , ) := Xi (yi X1i 1 X2i 2 ) (yi X1i 1 X2i 2 ). (2)
X2i

Let 1 B1 and 2 B2 where B1 Rp1 , B2 Rp2 , B1 B2 = B and p1 + p2 = p.

Problem 1: [3 points]
What are the GMM estimators of 1 and 2 using the optimal weighting matrix? What are the
GMM estimators of 1 and 2 using the identity matrix as the weighting matrix? Comment on
any observed or theoretical differences between these two sets of estimators.

Problem 2: [2 points]
What are the OLS estimators of 1 and 2 ? Denote them by b1 and b2 respectively.

In the following we will propose a test for the hypothesis H0 : 1 = 10 . We will use the following
notations and make the following assumptions for this purpose:
Notations:
0 0
i = yi X1i 10 X2i 20 ,  = (1 , . . . , n )0 , X1 = (X11
0 0 0
, . . . , X1n 0
) , X2 = (X21 0 0
, . . . , X2n ),
X = (X1 , X2 ) and y = (y1 , . . . , yn )0 .
Assumptions:

(i) E[2i |X] = 2 for i = 1, . . . , n.

1
ECON 870 Midterm 1 Saraswata Chaudhuri
Fall, 2010 Oct 19, 2010 Stanislav Khrapov

(ii) E[Xji Xli0 ] = jl for j, l = 1, 2 and i = 1, . . . , n. Define = ((jl ))j,l=1,2 and is positive
definite.

P
(iii) X 0 X/n
.

P
(iv) 0 /n
2.

d
(v) X 0 / n
(1 , 2 ) N (0, 2 ). Note that the dimension of j is pj 1 for
j = 1, 2.

Problem 3: [2 + 2 = 4 points]

What is the asymptotic distribution of ngn (0 )? How will you consistently estimate the
asymptotic variance?

Problem 4: [2 points]
What is the OLS estimator of 2 under the restriction imposed by H0 : 1 = 10 ? Denote it by
e2 (10 ).

Problem 5: [3 + 2 = 5 points]
e 0 
What is the asymptotic distribution of n 2 (1 ) 2 (X20 X2 )1 (X20 X1 ) n(10 10 )?
b

How will you consistently estimate the asymptotic variance of the distribution? Denote this
estimator by Vn ?
[Hint: X20 (y X1 10 ) = X20  + X20 X1 (10 10 ) + X20 X2 20 .]

Problem 6: [1 + 1 + 1 = 3 points]
Construct a statistic

 0  
H(10 ) := n e2 (10 ) b2 Vn1 0
2 (1 ) 2 .
e b (3)

2
ECON 870 Midterm 1 Saraswata Chaudhuri
Fall, 2010 Oct 19, 2010 Stanislav Khrapov

Consider the following three cases:

(i) 10 = 10 , i.e, the hypothesized value of 1 is the true value.

(ii) 10 = 10 + b/ n B1 (where b Rp1 , b 6= 0 and is fixed), i.e, the hypothesized value of

1 is in the n-neighborhood of the true value.

(iii) 10 = 10 + b B1 , i.e, the hypothesized value of 1 is a fixed distance away from the true
value.

Describe the asymptotic properties of H(10 ) under (i), (ii) and (iii).

Problem 7: [1 point]
Construct a test for H0 : 1 = 10 based on H(10 ) using your results from problem 6.

Problem 8: [2 point - extra credit]

Suppose that p2 < p1 . Is this test consistent? Why, why not? [For a consistent test the power
against fixed alternatives increases to 1 as sample size n . There is no credit for simply
guessing the right answer without providing adequate justification.]