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System of Equations
(a) The Kronecker product of matrices A and B is the pr qs matrix:
pq r s
a11 b11 . . . a11 b1s . . . . ... . . a11 br1 . . . a11 brs . a11 B . . . a1q B . . . . . . . . . . . . . AB = . = . . . . . . . . . . . . ap1 B . . . apq B a b p1 11 . . . ap1 b1s . . . . . ... . ap1 br1 . . . ap1 brs RULES (b) Associative Law: (A B ) C = A (B C ) = A B C (c) Distributive Law: (A + B ) C = (A C ) + (B C )
a1q b11 . . . a1q b1s . . . . . ... . a1q br1 . . . a1q brs . . . . . . . . . . . . . . . . . . apq b11 . . . apq b1s . . . . . ... . apq br1 . . . apq brs
(d) (A B )(C D) = AC BD, provided that AC and BD are dened. (e) (A B ) = A B (f) (A B )1 = A1 B 1 , provided that det(A) = 0 and det(B ) = 0 These can all be shown from rst principles.
(g) Note the dierence of (d),(e) and (f) from the standard matrix product. (h) For a matrix A with j th column denoted aj : . . . A = a1 . . . . . . We dene the vec operator by . . . aj . . . . . . . . . aq . . .
. . . a1 . . . . . . vec(A) = aj . . . . . . aq . . .
This turns an N q matrix into an N q 1 vector by stacking the columns of the matrix vertically. (i) vec(ABC ) = (C A)vec(B ).
2.1
Notational Convention
1. Say you have N equations i = 1, ..., N . For example, suppose we are estimating the demand functions for a selection of N dierent goods. 2. Observation in each equation taken at time t = 1, ..., T . y i1 y1t . . . . . . 3. We can either write yt = yit or yi = yit . . . . . . yN t yiT
N 1 T 1
4. yt gives all y values for equations 1 through to N at time t, whereas yi gives all the values of y in equation i for times t = 1 through to t = T .
6. Say we have k regressors, so that xt = (x1t , . . . , xkt ) and i = (i1 , . . . , ik ) are k dimensional vectors. 7. i is a k 1 vector, giving all slopes ij for j = 1, . . . , k for equation i
2. Multivariate Regression
A mulitvariate regression is a collection of N regressions, with the SAME set of regressors in each equation. So: yit = xt i + it i = 1, . . . N ; t = 1, . . . T
We now set up a matrix of y, , and x values, since we have these values either across time, across regressors, or across equations. We let the Matrix B stack the row vectors i : ... 1 . . . i . . . N ... ... ... ... ... 11 . . . 1k . . . . . . . . . = i1 . . . ik . . . . . . . . . N 1 . . . N k
N k
x1 . . . . . . ... xt . . . . . . ... xT
...
y1 . . . . . . ... yt . . . . . . ... yT
yN 1 . . . yN t . . . yN T
...
1 . . . . . . ... t . . . = . . . ... T . . .
11 . . . . . . . . . 1t . . . . . . . . . 1T . . .
i1 . . . . . . . . . it . . . . . . . . . iT T N ...
N 1 . . . N t . . . N T
= B xt + t
N k k1
t = 1, . . . , T
N 1
i = 1, . . . , N
T 1
For each equation i, we have all values of equation i at times t = 1, . . . , T We wish to write the whole system in one formula, and this is given by:
T N
Y = X B +
T k kN
T N
Every column of Y,
N . . .
N k1
. . . 1 . . . . . . 2 . . . . . . . . .
+ N . . .
. . . 1 . . . . . . 2 . . . . . . . . .
N T 1
N T 1
= ( IN X ) +
T k N k1
Where y = vec(Y ), = vec( ) and = vec(B ) Another way realise this is to consider: Y = XB IN + Now vec both sides, to give: vec(Y ) = vec(XB IN + ) y = vec(XB IN ) + vec( ) = (IN X )vec(B ) + = (IN X ) + Using RULE (i) on the penultimate line.