Frisch–Waugh–Lovell theorem

In econometrics, the Frisch–Waugh–Lovell (FWL) theorem is named after the econometricians Ragnar Frisch, Frederick V. Waugh, and Michael C. Lovell.[1][2][3]

The Frisch–Waugh–Lovell theorem states that if the regression we are concerned with is:

where and are and matrices respectively and where and are conformable, then the estimate of will be the same as the estimate of it from a modified regression of the form:

where projects onto the orthogonal complement of the image of the projection matrix . Equivalently, MX1 projects onto the orthogonal complement of the column space of X1. Specifically,

and this is known as the annihilator matrix [4] or orthogonal projection matrix.[5] This result implies that the secondary regression used for obtaining is unnecessary: using projection matrices to make the explanatory variables orthogonal to each other will lead to the same results as running the regression with all non-orthogonal explanators included.

References

  1. ↑ Frisch, Ragnar; Waugh, Frederick V. (1933). "Partial Time Regressions as Compared with Individual Trends". Econometrica. 1 (4): 387–401. JSTOR 1907330.
  2. ↑ Lovell, M. (1963). "Seasonal Adjustment of Economic Time Series and Multiple Regression Analysis". Journal of the American Statistical Association. 58 (304): 993–1010. doi:10.1080/01621459.1963.10480682.
  3. ↑ Lovell, M. (2008). "A Simple Proof of the FWL Theorem". Journal of Economic Education. 39 (1): 88–91. doi:10.3200/JECE.39.1.88-91.
  4. ↑ Hayashi, Fumio (2000). Econometrics. Princeton: Princeton University Press. pp. 18–19. ISBN 0-691-01018-8.
  5. ↑ Davidson, James (2000). Econometric Theory. Malden: Blackwell. p. 7. ISBN 0-631-21584-0.

Further reading

  • Ruud, P. A. (2000). An Introduction to Classical Econometric Theory. New York: Oxford University Press. pp. 54–60. ISBN 0-19-511164-8.
  • Davidson, Russell; MacKinnon, James G. (1993). Estimation and Inference in Econometrics. New York: Oxford University Press. pp. 19–24. ISBN 0-19-506011-3.
  • Davidson, Russell; MacKinnon, James G. (2004). Econometric Theory and Methods. New York: Oxford University Press. pp. 62–75. ISBN 0-19-512372-7.
  • Stachurski, John (2016). A Primer in Econometric Theory. MIT Press. pp. 311–314.
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