Frisch–Waugh–Lovell theorem

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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[edit]

  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[edit]