10 Fundamental Theorems for Econometrics

Thomas S. Robinson (https://ts-robinson.com)

2022-07-24 – v0.1.2
2
Preface

A list of 10 econometric theorems was circulated on Twitter citing what Jeffrey Wooldridge claims you need
to apply repeatedly in order to do econometrics. As a political scientist with applied statistics training, this
list caught my attention because it contains many of the theorems I see used in (methods) papers, but which
I typically glaze over for lack of understanding. The complete list (slightly paraphrased) is:
1. Law of Iterated Expectations, Law of Total Variance
2. Linearity of Expectations, Variance of a Sum
3. Jensen’s Inequality, Chebyshev’s Inequality
4. Linear Projection and its Properties
5. Weak Law of Large Numbers, Central Limit Theorem
6. Slutsky’s Theorem, Continuous Convergence Theorem, Asymptotic Equivalence Lemma
7. Big Op, Little op, and the algebra of them
8. Delta Method
9. Frisch-Waugh Partialling Out
10. For PD matrices A and B, A-B is PSD if and only if 𝐵−1 − 𝐴−1 is PSD.
As an exercise in improving my own knowledge of these fundamentals, I decided to work through each theorem
– using various lecture notes found online, and excellent textbooks like Aronow & Miller’s (2019) Foundations
of Agnostic Statistics, Angrist and Pischke’s (2008) Mostly Harmless Econometrics, and Wasserman’s (2004)
All of Statistics.

3
I found for a list of important theorems there were few consistent sources that contained explanations and
proofs of each item. Often, textbooks had excellent descriptive intuitions but would hold back on offering
full, annotated proofs. Or full proofs were offered without explaining the wider significance of the theorems.
Some of the concepts, moreover, had different definitions dependent on the field or source of the proof (like
Slutsky’s Theorems)!
This resource is an attempt to collate my writing on these theorems – the intuitions, proofs, and examples –
into a single document. I have taken some liberties in doing so – for instance combining Wooldridge’s first
two points into a single chapter on ‘Expectation Theorems’, and often omit continuous proofs where discrete
proofs are similar and easier to follow. That said, I have tried to be reasonably exhaustive in my proofs so
that they are accessible to those (like me) without a formal statistics background.
The inspiration for this project was Jeffrey Wooldridge’s list, an academic whose work I admire greatly. This
document, however, is in no way endorsed by or associated with him. Most of the applied examples (and
invisible corrections to my maths) stem from discussions with Andy Eggers and Musashi Harukawa. There
will inevitably still be some errors, omissions, and confusing passages. I would be more than grateful to
receive any feedback at [email protected] or via the GitHub repo for this project.

Prerequisites

I worked through these proofs learning the bits of maths I needed as I went along. For those who want to
consult Google a little less than I had to, the following should ease you into the more formal aspects of this
document:
• A simple working knowledge of probability theory
• The basics of expectation notation, but you don’t need to know any expectation rules (I cover the
important ones in Chapter 1).
• A basic understanding of linear algebra (i.e. how you multiply matrices, what transposition is, and what
the identity matrix looks like). More complicated aspects like eigenvalues and Gaussian elimination
make fleeting appearances, particularly in Chapter 9, but these are not crucial.
• Where relevant, I provide coded examples in R. I’ve kept my use of packages to a minimum so the
code should be reasonably easy to read/port to other programming languages.

Version notes

v0.1.1
Minor changes thanks to Anirban Mitra and Xiaowei Zhang!
v0.1
This is the first complete draft, and some sections are likely to be changed in future versions. For instance,
in Chapter 9 I would like to provide a more comprehensive overview of quadratic form in linear algebra, how
we derive gradients, and hence the shape of PD matrices. Again, any suggestions on ways to improve/add
to this resource are very much welcome!
10 Fundamental Theorems for Econometrics by Thomas Samuel Robinson is licensed under CC BY-NC-SA
4.0

4
Chapter 1

Expectation Theorems

This chapter sets out some of the basic theorems that can be derived from the definition of expectations,
as highlighted by Wooldridge. I have combined his first two points into a single overview of expectation
maths. The theorems themselves are not as immediately relevant to applied research as some of the later
theorems on Wooldridge’s list. However, they often form the fundamental basis upon which future proofs
are conducted.

1.1 Law of Iterated Expectations

The Law of Iterated Expectations (LIE) states that:

𝔼[𝑋] = 𝔼[𝔼[𝑋|𝑌 ]] (1.1)

In plain English, the expected value of 𝑋 is equal to the expectation over the conditional expectation of 𝑋
given 𝑌 . More simply, the mean of X is equal to a weighted mean of conditional means.

Aronow & Miller (2019) note that LIE is ‘one of the most important theorems’, because being able to express
unconditional expectation functions in terms of conditional expectations allow you to hold some parameters
fixed, making calculations more tractable.

1.1.1 Proof of LIE

First, we can express the expectation over conditional expectations as a weighted sum over all possible values
of Y, and similarly express the conditional expectations using summation too:

𝔼[𝔼[𝑋|𝑌 ]] = ∑ 𝔼[𝑋|𝑌 = 𝑦]𝑃 (𝑌 = 𝑦) (1.2)

𝑦

= ∑ ∑ 𝑥𝑃 (𝑋 = 𝑥|𝑌 = 𝑦)𝑃 (𝑌 = 𝑦) (1.3)

𝑦 𝑥

= ∑ ∑ 𝑥𝑃 (𝑌 = 𝑦|𝑋 = 𝑥)𝑃 (𝑋 = 𝑥)., (1.4)

𝑦 𝑥

5
Note that the final line follows due to Bayes’ Rule.1 And so:

... = ∑ ∑ 𝑥𝑃 (𝑋 = 𝑥)𝑃 (𝑌 = 𝑦|𝑋 = 𝑥) (1.5)

𝑦 𝑥

= ∑ 𝑥𝑃 (𝑋 = 𝑥) ∑ 𝑃 (𝑌 = 𝑦|𝑋 = 𝑥) (1.6)
𝑥 𝑦

= ∑ 𝑥𝑃 (𝑋 = 𝑥) (1.7)
𝑥
= 𝔼[𝑋] □ (1.8)

The last steps of the proof are reasonably simple. Equation 1.5 is a trivial rearrangement of terms. The
second line follows since 𝑦 does not appear in 𝑥𝑃 (𝑋 = 𝑥) and so we can move the summation over 𝑌 to within
the summation over 𝑋. The final line follows from the fact that the sum of the conditional probabilities
𝑃 (𝑌 = 𝑦|𝑋 = 𝑥) = 1 (by simple probability theory).

1.2 Law of Total Variance

The Law of Total Variance (LTV) states the following:
𝑣𝑎𝑟[𝑌 ] = 𝔼[𝑣𝑎𝑟[𝑌 |𝑋]] + 𝑣𝑎𝑟(𝔼[𝑌 |𝑋]) (1.9)

1.2.1 Proof of LTV

LTV can be proved almost immediately using LIE and the definition of variance:

𝑣𝑎𝑟(𝑌 ) = 𝔼[𝑌 2 ] − 𝔼[𝑌 ]2 (1.10)

= 𝔼[𝔼[𝑌 2 |𝑋]] − 𝔼[𝔼[𝑌 |𝑋]]2 (1.11)
2 2
= 𝔼[𝑣𝑎𝑟[𝑌 |𝑋] + 𝔼[𝑌 ] ]] − 𝔼[𝔼[𝑌 |𝑋]] (1.12)
2 2
= 𝔼[𝑣𝑎𝑟[𝑌 |𝑋]] + (𝔼[𝔼[𝑌 ] ] − 𝔼[𝔼[𝑌 |𝑋]] ) (1.13)
= 𝔼[𝑣𝑎𝑟[𝑌 |𝑋]] + 𝑣𝑎𝑟(𝔼[𝑌 |𝑋]) □ (1.14)

The second line applies LIE to both 𝑌 2 and 𝑌 separately. Then we apply the definition of variance to
𝔼[𝑌 2 |𝑋], and subsequently decompose this term (since 𝔼[𝐴 + 𝐵] = 𝔼[𝐴] + 𝔼[𝐵].

1.3 Linearity of Expectations

The Linearity of Expectations (LOE) simply states that:

𝔼[𝑎𝑋 + 𝑏𝑌 ] = 𝑎𝔼[𝑋] + 𝑏𝔼[𝑌 ], (1.15)

where 𝑎 and 𝑏 are real numbers, and 𝑋 and 𝑌 are random variables.
1 Bayes’ 𝑃 (𝐵|𝐴)𝑃 (𝐴)
Rule states 𝑃 (𝐴|𝐵) = 𝑃 (𝐵) . Therefore:

𝑃 (𝑌 = 𝑦|𝑋 = 𝑥)𝑃 (𝑋 = 𝑥)𝑃 (𝑌 = 𝑦)

𝑃 (𝑋 = 𝑥|𝑌 = 𝑦) × 𝑃 (𝑌 = 𝑦) =
𝑃 (𝑌 = 𝑦)
= 𝑃 (𝑌 = 𝑦|𝑋 = 𝑥)𝑃 (𝑋 = 𝑥).

6
1.3.1 Proof of LOE

𝔼[𝑎𝑋 + 𝑏𝑌 ] = ∑ ∑(𝑎𝑥 + 𝑏𝑦)𝑃 (𝑋 = 𝑥, 𝑌 = 𝑦) (1.16)

𝑥 𝑦

= ∑ ∑ 𝑎𝑥𝑃 (𝑋 = 𝑥, 𝑌 = 𝑦) + ∑ ∑ 𝑏𝑦𝑃 (𝑋 = 𝑥, 𝑌 = 𝑦) (1.17)

𝑥 𝑦 𝑥 𝑦

= 𝑎 ∑ 𝑥 ∑ 𝑃 (𝑋 = 𝑥, 𝑌 = 𝑦) + 𝑏 ∑ 𝑦 ∑ 𝑃 (𝑋 = 𝑥, 𝑌 = 𝑦) (1.18)
𝑥 𝑦 𝑦 𝑥

(1.19)

The first line simply expands the expectation into summation form i.e. the expectation is the sum of 𝑎𝑋 +𝑏𝑌
for each (discrete) value of 𝑋 and 𝑌 weighted by their joint probability. We then expand out these terms.
Since summations are commutative, we can rearrange the order of the summations for each of the two parts
in the final line, and shift the real numbers and random variables outside the various operators.
Now note that ∑𝑖 𝑃 (𝐼 = 𝑖, 𝐽 = 𝑗) ≡ 𝑃 (𝐽 = 𝑗) by probability theory. Therefore:

... = 𝑎 ∑ 𝑥𝑃 (𝑋 = 𝑥) + 𝑏 ∑ 𝑦𝑃 (𝑌 = 𝑦) (1.20)
𝑥 𝑦

The two terms within summations are just the weighted averages of 𝑋 and 𝑌 respectively, i.e. the expectations
of 𝑋 and 𝑌 , so:

... = 𝑎𝔼[𝑋] + 𝑏𝔼[𝑌 ] □ (1.21)

(1.22)

1.4 Variance of a Sum

There are two versions of the Variance of a Sum (VOS) law:
• 𝑣𝑎𝑟(𝑋 + 𝑌 ) = 𝑣𝑎𝑟(𝑋) + 𝑣𝑎𝑟(𝑌 ), when X and Y are independent
• 𝑣𝑎𝑟(𝑋 + 𝑌 ) = 𝑣𝑎𝑟(𝑋) + 𝑣𝑎𝑟(𝑌 ) + 2𝐶𝑜𝑣(𝑋, 𝑌 ), when X and Y are correlated

1.4.1 Proof of VoS: 𝑋, 𝑌 are independent

𝑣𝑎𝑟(𝑋 + 𝑌 ) = 𝔼[(𝑋 + 𝑌 )2 ] − (𝔼[𝑋 + 𝑌 ])2 (1.23)

= 𝔼[(𝑋 2 + 2𝑋𝑌 + 𝑌 2 )] − (𝔼[𝑋] + 𝔼[𝑌 ])2 (1.24)

The first line of the proof is simply the definition of variance. In the second line, we expand the equation in
the first term and using LOE decompose the second term. We can expand this equation further, continuing
to use LOE and noting that :

... = 𝔼[𝑋 2 ] + 𝔼[2𝑋𝑌 ] + 𝔼[𝑌 2 ] − (𝔼[𝑋]2 + 2𝔼[𝑋]𝔼[𝑌 ] + 𝔼[𝑌 ]2 ) (1.25)

2 2 2 2
= 𝔼[𝑋 ] + 𝔼[𝑌 ] − 𝔼[𝑋] − 𝔼[𝑌 ] (1.26)
= 𝑉 𝑎𝑟[𝑋] + 𝑉 𝑎𝑟[𝑌 ] □ (1.27)

since 𝔼[𝐴]𝔼[𝐵] = 𝔼[𝐴𝐵] when 𝐴 and 𝐵 are independent.

7
1.4.2 Proof of VoS: 𝑋, 𝑌 are dependent

As before, we can expand out the variance of a sum into its expected values:

𝑣𝑎𝑟(𝑋 + 𝑌 ) = 𝔼[𝑋 2 ] + 𝔼[2𝑋𝑌 ] + 𝔼[𝑌 2 ] − (𝔼[𝑋]2 + 2𝔼[𝑋]𝔼[𝑌 ] + 𝔼[𝑌 ]2 ). (1.28)

Since 𝑋 and 𝑌 are assumed to be dependent, the non-squared terms do not necessarily cancel each other
out anymore. Instead, we can rearrange as follows:

𝑣𝑎𝑟(𝑋 + 𝑌 ) = 𝑣𝑎𝑟(𝑋) + 𝑣𝑎𝑟(𝑌 ) + 𝔼[2𝑋𝑌 ] − 2𝔼[𝑋]𝔼[𝑌 ] (1.29)

= 𝑣𝑎𝑟(𝑋) + 𝑣𝑎𝑟(𝑌 ) + 2(𝔼[𝑋𝑌 ] − 𝔼[𝑋]𝔼[𝑌 ]), (1.30)

and note that 𝔼[𝐴𝐵] − 𝔼[𝐴]𝔼[𝐵] = 𝐶𝑜𝑣(𝐴, 𝐵):

... = 𝑣𝑎𝑟(𝑋) + 𝑣𝑎𝑟(𝑌 ) + 2𝐶𝑜𝑣(𝐴, 𝐵) □ (1.31)

Two further points are worth noting. First, the independent version of the proof is just a special case of the
dependent version of the proof. When 𝑋 and 𝑌 are independent, the covariance between the two random
variables is zero, and therefore the the variance of the sum is just equal to the sum of the variances.
Second, nothing in the above proofs rely on there being just two random variables. In fact,
𝑛 𝑛
𝑣𝑎𝑟(∑𝑖 𝑋𝑖 ) = ∑𝑖 𝑣𝑎𝑟(𝑋𝑖 ) when all variables are independent from each other, and equal to
𝑛 𝑛
∑𝑖 𝑣𝑎𝑟(𝑋𝑖 ) + 2 ∑1≤𝑖<𝑗≤𝑛 𝐶𝑜𝑣(𝑋𝑖 , 𝑋𝑗 ). This can be proved by induction using the above proofs, but
intuitively: we can replace, for example, 𝑌 with 𝑌 = (𝑌1 + 𝑌2 ) and iteratively apply the above proof first
to 𝑋 + 𝑌 and then subsequently expand 𝑣𝑎𝑟(𝑌 ) as 𝑣𝑎𝑟(𝑌1 + 𝑌2 ).

8
Chapter 2

Inequalities involving expectations

This chapter discusses and proves two inequalities that Wooldridge highlights - Jensen’s and Chebyshev’s.
Both involve expectations (and the theorems derived in the previous chapter).

2.1 Jensen’s Inequality

Jensen’s Inequality is a statement about the relative size of the expectation of a function compared with the
function over that expectation (with respect to some random variable). To understand the mechanics, I first
define convex functions and then walkthrough the logic behind the inequality itself.

2.1.1 Convex functions

A function 𝑓 is convex (in two dimensions) if all points on a straight line connecting any two points on the
graph of 𝑓 is above or on that graph. More formally, 𝑓 is convex if for ∀𝑥1 , 𝑥2 ∈ ℝ, and ∀𝑡 ∈ [0, 1]:

𝑓(𝑡𝑥1 , (1 − 𝑡)𝑥2 ) ≤ 𝑡𝑓(𝑥1 ) + (1 − 𝑡)𝑓(𝑥2 ).

Here, 𝑡 is a weighting parameter that allows us to range over the full interval between points 𝑥1 and 𝑥2 .
Note also that concave functions are defined as the opposite of convex functions i.e. a function ℎ is concave
if and only if −ℎ is convex.

2.1.2 The Inequality

Jensen’s Inequality (JI) states that, for a convex function 𝑔 and random variable 𝑋:

𝔼[𝑔(𝑋)] ≥ 𝑔(𝐸[𝑋])

This inequality is exceptionally general – it holds for any convex function. Moreover, given that concave
functions are defined as negative convex functions, it is easy to see that JI also implies that if ℎ is a concave
function, ℎ(𝔼[𝑋]) ≥ 𝔼[ℎ(𝑋)].1
Interestingly, note the similarity between this inequality and the definition of variance in terms of expecta-
tions:
1 Since −ℎ(𝑥) is convex, 𝔼[−ℎ(𝑋)] ≥ −ℎ(𝔼[𝑋]) by JI. Hence, ℎ(𝔼[𝑋]) − 𝔼[ℎ(𝑋)] ≥ 0 and so ℎ(𝔼[𝑋]) ≥ 𝔼[ℎ(𝑋)].

9
 𝑣𝑎𝑟(𝑋) = 𝔼[𝑋 2 ] − (𝔼[𝑋])2 ,

and since 𝑣𝑎𝑟(𝑋) is always positive:

𝔼[𝑋 2 ] − (𝔼[𝑋])2 ≥ 0
𝔼[𝑋 2 ] ≥ (𝔼[𝑋])2 ).

We can therefore define 𝑔(𝑋) = 𝑋 2 (a convex function), and see that variance itself is an instance of Jensen’s
Inequality.

2.1.3 Proof

Assume 𝑔(𝑋) is a convex function, and 𝐿(𝑋) = 𝑎 + 𝑏𝑋 is a linear function tangential to 𝑔(𝑋) at point 𝔼[𝑋].
Hence, since 𝑔 is convex and 𝐿 is tangential to 𝑔, we know by definition that:

𝑔(𝑥) ≥ 𝐿(𝑥), ∀𝑥 ∈ 𝑋. (2.1)

So, therefore:

𝔼[𝑔(𝑋)] ≥ 𝔼[𝐿(𝑋)] (2.2)

≥ 𝔼[𝐴 + 𝑏𝑋] (2.3)
≥ 𝑎 + 𝑏𝔼[𝑋] (2.4)
≥ 𝐿(𝔼[𝑋]) (2.5)
≥ 𝑔(𝔼[𝑋]) □ (2.6)

The majority of this proof is straightforward. If one function is always greater than or equal to another
function, then the unconditional expectation of the first function must be at least as big as that of the
second. The interior lines of the proof follow from the definition of 𝐿, the linearity of expectations, and
another application of the definition of 𝐿 respectively.
The final line then follows because, by the definition of the straight line 𝐿, we know that 𝐿[𝔼[𝑋]] is tangential
with 𝑔 at 𝔼[𝔼[𝑋]] = 𝔼[𝑋] = 𝑔(𝔼[𝑋]).2

2.1.4 Application

In Chapter 2 of Agnostic Statistics (2019), the authors note (almost in passing) that the standard error of the
𝑝
mean is not unbiased, i.e. that 𝔼[𝜎]̂ ≠ 𝜎, even though it is consistent i.e. that 𝜎̂ −
→ 𝜎. The bias of the mean’s
standard error is somewhat interesting (if not surprising), given how frequently we deploy the standard
error (and, in a more general sense, highlights how important asymptotics are not just for the estimation of
parameters, but also those parameters’ uncertainty). The proof of why 𝜎̂ is biased also, conveniently for this
chapter, uses Jensen’s Inequality.
The standard error of the mean is denoted as

𝜎 = √𝑉 (𝑋)̄
2 Based on lecture notes by Larry Wasserman.

10
,
where 𝑉 (𝑋)̄ = 𝑉 (𝑋)
𝑛 .

Our best estimate of this quantity 𝜎̂ = √𝑉 ̂ (𝑋)̄ is simply the square root of the sample variance estimator.
We know that the variance estimator itself is unbiased and a consistent estimator of the sampling variance
(see Agnostic Statistics Theorem 2.1.9).
The bias in the estimate of the sample mean’s standard error originates from the square root function
Note that the square root is a strictly concave function. This means we can make two claims about the
estimator. First, as with any concave function we can use the inverse version of Jensen’s Inequality, i.e. that
𝔼[𝑔(𝑋)] ≤ 𝑔(𝔼[𝑋]). Second, since the square root is a strictly concave function, we can use the weaker “less
than or equal to” operator with the strict “less than” inequality. Hence, the proof is reasonably easy:

𝔼 [𝜎]̂ = 𝔼 [√𝑉 ̂ (𝑋)]

̄ < √𝔼[𝑉 ̂ (𝑋)]
̄ (by Jensen’s Inequality)

< √𝑉 (𝑋)̄ (since the sampling variance is unbiased)

< 𝜎. □

The first line follows by first defining the conditional expectation of the sample mean’s standard error, and
then applying the noted variant of Jensen’s inequality. Then, since we know that the standard error estimator
of the variance is unbiased, we can replace the expectation with the true sampling variance, and note finally
that the square root of the true sampling variance is, by definition, the true standard error of the sample
mean. Hence, we see that our estimator of the sampling mean’s standard error is strictly less than the true
value and therefore is biased.

2.2 Chebyshev’s Inequality

The other inequality Wooldridge highlights is the Chebyshev Inequality. This inequality states that for a
set of probability distributions, no more than a specific proportion of that distribution is more than a set
distance from the mean.
More formally, if 𝜇 = 𝔼[𝑋] and 𝜎2 = 𝑣𝑎𝑟(𝑋), then:

1
𝑃 (|𝑍| ≥ 𝑘) ≤ , (2.7)
𝑘2

where 𝑍 = (𝑋 − 𝜇)/𝜎 (Wasserman, 2004, p.64) and 𝑘 indicates the number of standard deviations.

2.2.1 Proof

First, let us define the variance (𝜎2 ) as:

𝜎2 = 𝔼[(𝑋 − 𝜇)2 ]. (2.8)

By expectation theory, we know that we can express any unconditional expectation as the weighted sum of
its conditional components i.e. 𝔼[𝐴] = ∑𝑖 𝔼[𝐴|𝑐𝑖 ]𝑃 (𝑐𝑖 ), where ∑𝑖 𝑃 (𝑐𝑖 ) = 1. Hence:

... = 𝔼[(𝑋 − 𝜇)2 |𝑘𝜎 ≤ |𝑋 − 𝜇|]𝑃 (𝑘𝜎 ≤ |𝑋 − 𝜇|) + 𝔼[(𝑋 − 𝜇)2 |𝑘𝜎 > |𝑋 − 𝜇|]𝑃 (𝑘𝜎 > |𝑋 − 𝜇|) (2.9)

11
Since any probability is bounded between 0 and 1, and variance must be greater than or equal to zero, the
second term must be non-negative. If we remove this term, therefore, the right-hand side is necessarily either
the same size or smaller. Therefore we can alter the equality to the following inequality:

𝜎2 ≥ 𝔼[(𝑋 − 𝜇)2 |𝑘𝜎 ≤ 𝑋 − 𝜇]𝑃 (𝑘𝜎 ≤ |𝑋 − 𝜇|) (2.10)

This then simplifies:

𝜎2 ≥ (𝑘𝜎)2 𝑃 (𝑘𝜎 ≤ |𝑋 − 𝜇|)

≥ 𝑘2 𝜎2 𝑃 (𝑘𝜎 ≤ |𝑋 − 𝜇|)
1
≥ 𝑃 (|𝑍| ≥ 𝑘) □
𝑘2

Conditional on 𝑘𝜎 ≤ |𝑋 − 𝜇|, (𝑘𝜎)2 ≤ (𝑋 − 𝜇)2 , and therefore 𝔼[(𝑘𝜎)2 ] ≤ 𝔼[(𝑋 − 𝜇)2 ]. Then, the last step
simply rearranges the terms within the probability function.3

2.2.2 Applications

Wasserman (2004) notes that this inequality is useful when we want to know the probable bounds of an
unknown quantity, and where direct computation would be difficult. It can also be used to prove the Weak
Law of Large Numbers (point 5 in Wooldridge’s list!), which I demonstrate here.
It is worth noting, however, that the inequality is really powerful – it guarantees that a certain amount of a
probability distribution is within a certain region – irrespective of the shape of that distribution (so long as
we can estimate the mean and variance)!
For some well-defined distributions, this theorem is weaker than what we know by dint of their form. For
example, we know that for a normal distribution, approximately 95 percent of values lie within 2 standard
deviations of the mean. Chebyshev’s Inequality only guarantees that 75 percent of values lie within two
standard deviations of the mean (since 𝑃 (|𝑍| ≥ 𝑘) ≤ 212 ). Crucially, however, even if we didn’t know
whether a given distribution was normal, so long as it is a well-behaved probability distribution (i.e. the
unrestricted integral sums to 1) we can guarantee that 75 percent will lie within two standard deviations of
the mean.

3 𝑘𝜎 ≤ |𝑋 − 𝜇| ≡ 𝑘 ≤ |𝑋 − 𝜇|/𝜎 ≡ |𝑍| ≥ 𝑘, since 𝜎 is strictly non-negative.

12
Chapter 3

Linear Projection

This chapter provides a basic introduction to projection using both linear algebra and geometric demon-
strations. I discuss the derivation of the orthogonal projection, its general properties as an “operator”, and
explore its relationship with ordinary least squares (OLS) regression. I defer a discussion of linear projections’
applications until the penultimate chapter on the Frisch-Waugh Theorem, where projection matrices feature
heavily in the proof.

3.1 Projection

Formally, a projection 𝑃 is a linear function on a vector space, such that when it is applied to itself you get
the same result i.e. 𝑃 2 = 𝑃 .1

This definition is slightly intractable, but the intuition is reasonably simple. Consider a vector 𝑣 in two-
dimensions. 𝑣 is a finite straight line pointing in a given direction. Suppose there is some point 𝑥 not on
this straight line but in the same two-dimensional space. The projection of 𝑥, i.e. 𝑃 𝑥, is a function that
returns the point “closest” to 𝑥 along the vector line 𝑣. Call this point 𝑥.̄ In most contexts, closest refers
to Euclidean distance, i.e. √∑𝑖 (𝑥𝑖 − 𝑥𝑖̄ )2 , where 𝑖 ranges over the dimensions of the vector space (in this
case two dimensions).2 Figure 3.1 depicts this logic visually. The green dashed line shows the orthogonal
projection, and red dashed lines indicate other potential (non-orthgonal) projections that are further away
in Euclidean space from 𝑥 than 𝑥.̄

In short, projection is a way of simplifying some n-dimensional space – compressing information onto a
(hyper-) plane. This is useful especially in social science settings where the complexity of the phenomena we
study mean exact prediction is impossible. Instead, we often want to construct models that compress busy
and variable data into simpler, parsimonious explanations. Projection is the statistical method of achieving
this – it takes the full space and simplifies it with respect to a certain number of dimensions.

While the above is (reasonably) intuitive it is worth spelling out the maths behind projection, not least
because it helps demonstrate the connection between linear projection and linear regression.

To begin, we can take some point in n-dimensional space, 𝑥, and the vector line 𝑣 along which we want to
project 𝑥. The goal is the following:

1 Since 𝑃 is (in the finite case) a square matrix, a projection matrix is an idempotent matrix – I discuss this property in

more detail later on in this note.

2 Euclidean distance has convenient properties, including that the closest distance between a point and a vector line is

orthogonal to the vector line itself.

13
 Figure 3.1: Orthogonal projection of a point onto a vector line.

𝑎𝑟𝑔 𝑚𝑖𝑛𝑐 √∑(𝑥𝑖̄ − 𝑥)2 = 𝑎𝑟𝑔 𝑚𝑖𝑛𝑐 ∑(𝑥𝑖̄ − 𝑥)2

𝑖 𝑖

= 𝑎𝑟𝑔 𝑚𝑖𝑛𝑐 ∑(𝑐𝑣𝑖 − 𝑥)2

𝑖

This rearrangement follows since the square root is a monotonic transformation, such that the optimal
choice of 𝑐 is the same across both 𝑎𝑟𝑔 𝑚𝑖𝑛’s. Since any potential 𝑥̄ along the line drawn by 𝑣 is some scalar
multiplication of that line (𝑐𝑣), we can express the function to be minimised with respect to 𝑐, and then
differentiate:

𝑑
∑(𝑐𝑣𝑖 − 𝑥)2 = ∑ 2𝑣𝑖 (𝑐𝑣𝑖 − 𝑥)
𝑑𝑐 𝑖 𝑖

= 2(∑ 𝑐𝑣𝑖2 − ∑ 𝑣𝑖 𝑥)
𝑖 𝑖
= 2(𝑐𝑣′ 𝑣 − 𝑣′ 𝑥) ⇒ 0

Here we differentiate the equation and rearrange terms. The final step simply converts the summation
notation into matrix multiplication. Solving:

2(𝑐𝑣′ 𝑣 − 𝑣′ 𝑥) = 0
𝑐𝑣′ 𝑣 − 𝑣′ 𝑥 = 0
𝑐𝑣′ 𝑣 = 𝑣′ 𝑥
𝑐 = (𝑣′ 𝑣)−1 𝑣′ 𝑥.

From here, note that 𝑥,̄ the projection of 𝑥 onto the vector line, is 𝑣𝑐 = 𝑣(𝑣′ 𝑣)−1 𝑣′ 𝑥. Hence, we can define
the projection matrix of 𝑥 onto 𝑣 as:

14
 𝑃𝑣 = 𝑣(𝑣′ 𝑣)−1 𝑣′ .

In plain English, for any point in some space, the orthogonal projection of that point onto some subspace,
is the point on a vector line that minimises the Euclidian distance between itself and the original point. A
visual demonstration of this point is shown and discussed in Figure ?? below.
Note also that this projection matrix has a clear analogue to the linear algebraic expression of linear regression.
The vector of coefficients in a linear regression 𝛽 ̂ can be expressed as (𝑋 ′ 𝑋)−1 𝑋 ′ 𝑦. And we know that
multiplying this vector by the matrix of predictors 𝑋 results in the vector of predicted values 𝑦.̂ Now we
have 𝑦 ̂ = 𝑋(𝑋 ′ 𝑋)−1 𝑋 ′ 𝑌 ≡ 𝑃𝑋 𝑦. Clearly, therefore, linear projection and linear regression are closely related
– and I return to this point below.

3.2 Properties of the projection matrix

The projection matrix 𝑃 has several interesting properties. First, and most simply, the projection matrix is
square. Since 𝑣 is of some arbitrary dimensions 𝑛 × 𝑘, its transpose is of dimensions 𝑘 × 𝑛. By linear algebra,
the shape of the full matrix is therefore 𝑛 × 𝑛, i.e. square.
Projection matrices are also symmetric, i.e. 𝑃 = 𝑃 ′ . To prove symmetry, note that transposing both sides
of the projection matrix definition:

𝑃 ′ = (𝑣(𝑣′ 𝑣)−1 𝑣′ )′ (3.1)

′ −1 ′
= 𝑣(𝑣 𝑣) 𝑣 (3.2)
= 𝑃, (3.3)

since (𝐴𝐵)′ = 𝐵′ 𝐴′ and (𝐴−1 )′ = (𝐴′ )−1 .

Projection matrices are idempotent:

𝑃 𝑃 = 𝑣(𝑣′ 𝑣)−1 𝑣′ 𝑣(𝑣′ 𝑣)−1 𝑣′ (3.4)

′ −1 ′
= 𝑣(𝑣 𝑣) 𝑣 (3.5)
= 𝑃, (3.6)

since (𝐴)−1 𝐴 = 𝐼 and 𝐵𝐼 = 𝐵.

Since, projection matrices are idempotent, this entails that projecting a point already on the vector line will
just return that same point. This is fairly intuitive: the closest point on the vector line to a point already
on the vector line is just that same point.
Finally, we can see that the projection of any point is orthogonal to the respected projected point on vector
line. Two vectors are orthogonal if 𝑎𝑏 = 0. Starting with the expression in Equation 3.1 (i.e. minimising the
Euclidean distance with respect to 𝑐):

2(𝑐𝑣′ 𝑣 − 𝑣′ 𝑥) = 0
𝑣′ 𝑐𝑣 − 𝑣′ 𝑥 = 0
𝑣′ (𝑐𝑣 − 𝑥) = 0
𝑣′ (𝑥̄ − 𝑥) = 0,

hence the line connecting the original point 𝑥 is orthogonal to the vector line.

15
The projection matrix is very useful in other fundamental theorems in econometrics, like Frisch Waugh Lovell
Theorem discussed in Chapter 8.

3.3 Linear regression

Given a vector of interest, how do we capture as much information from it as possible using set of predictors?
Projection matrices essentially simplify the dimensionality of some space, by casting points onto a lower-
dimensional plane. Think of it like capturing the shadow of an object on the ground. There is far more
detail in the actual object itself but we roughly know its position, shape, and scale from the shadow that’s
cast on the 2d plane of the ground.

Note also this is actually quite similar to how we think about regression. Loosely, when we regress 𝑌 on
𝑋, we are trying to characterise how the components (or predictors) within 𝑋 characterise or relate to
𝑌 . Of course, regression is also imperfect (after all, the optimisation goal is to minimise the errors of our
predictions). So, regression also seems to capture some lower dimensional approximation of an outcome.

In fact, linear projection and linear regression are very closely related. In this final section, I outline how
these two statistical concepts relate to each other, both algebraically and geometrically,

Suppose we have a vector of outcomes 𝑦, and some n-dimensional matrix 𝑋 of predictors. We write the
linear regression model as:

𝑦 = 𝑋𝛽 + 𝜖, (3.7)

where 𝛽 is a vector of coefficients, and 𝜖 is the difference between the prediction and the observed value in
𝑦. The goal of linear regression is to minimise the sum of the squared residuals:

𝑎𝑟𝑔 𝑚𝑖𝑛 𝜖2 = 𝑎𝑟𝑔 𝑚𝑖𝑛(𝑦 − 𝑋𝛽)′ (𝑦 − 𝑋𝛽)

Differentiating with respect to �and solving:

𝑑
(𝑦 − 𝑋𝛽)′ (𝑦 − 𝑋𝛽) = −2𝑋(𝑦 − 𝑋𝛽)
𝑑𝛽
= 2𝑋 ′ 𝑋𝛽 − 2𝑋 ′ 𝑦 ⇒ 0
𝑋′𝑋𝛽 ̂ = 𝑋′𝑦
(𝑋 ′ 𝑋)−1 𝑋 ′ 𝑋 𝛽 ̂ = (𝑋 ′ 𝑋)−1 𝑋 ′ 𝑦
𝛽 ̂ = (𝑋 ′ 𝑋)−1 𝑋 ′ 𝑦.

To get our prediction of 𝑦, i.e. 𝑦,̂ we simply multiply our beta coefficient by the matrix X:

𝑦 ̂ = 𝑋(𝑋 ′ 𝑋)−1 𝑋 ′ 𝑦.

Note how the OLS derivation of 𝑦 ̂ is very similar to 𝑃 = 𝑋(𝑋 ′ 𝑋)−1 𝑋, the orthogonal prediction matrix.
The two differ only in that that 𝑦 ̂ includes the original outcome vector 𝑦 in its expression. But, note that
𝑃 𝑦 = 𝑋(𝑋 ′ 𝑋)−1 𝑋 ′ 𝑦 = 𝑦!̂ Hence the predicted values from a linear regression simply are an orthogonal
projection of 𝑦 onto the space defined by 𝑋.

16
3.3.1 Geometric interpretation

It should be clear now that linear projection and linear regression are connected – but it is probably less
clear why this holds. To understand what’s going on, let’s depict the problem geometrically.3
To appreciate what’s going on, we first need to invert how we typically think about observations, variables
and datapoints. Consider a bivariate regression problem with three observations. Our data will include three
variables: a constant (c, a vector of 1’s), a predictor (X), and an outcome variable (Y). As a matrix, this
might look something like the following:

Y X c
2 3 1
3 1 1
2 1 1

Typically we would represent the relationship geometrically by treating the variables as dimensions, such
that every datapoint is an observation (and we would typically ignore the constant column since all its values
are the same).
An alternative way to represent this data is to treat each observation (i.e. row) as a dimension and then
represent each variable as a vector. What does that actually mean? Well consider the column 𝑌 = (2, 3, 2).
This vector essentially gives us the coordinates for a point in three-dimensional space: 𝑑1 = 2, 𝑑2 = 3, 𝑑3 = 2.
Drawing a straight line from the origin (0,0,0) to this point gives us a vector line for the outcome. While
visually this might seem strange, from the perspective of our data it’s not unusual to refer to each variable as
a column vector, and that’s precisely because it is a quantity with a magnitude and direction (as determined
by its position in 𝑛 dimensions).
Our predictors are the vectors 𝑋 and 𝑐 (note the vector 𝑐 is now slightly more interesting because it is a
diagonal line through the three-dimensional space). We can extend either vector line by multiplying it by
a constant e.g. 2𝑋 = (6, 2, 2). With a single vector, we can only move forwards or backwards along a line.
But if we combine two vectors together, we can actually reach lots of points in space. Imagine placing the
vector 𝑋 at the end of the 𝑐. The total path now reaches a new point that is not intersected by either 𝑋 or
𝑐. In fact, if we multiply 𝑋 and 𝑐 by some scalars (numbers), we can snake our way across a whole array of
different points in three-dimensional space. Figure 3.2 demonstrates some of these combinations in the two
dimensional space created by 𝑋 and 𝑐.
The comprehensive set of all possible points covered by linear combinations of 𝑋 and 𝑐 is called the span or
column space. In fact, with the specific set up of this example (3 observations, two predictors), the span of
our predictors is a flat plane. Imagine taking a flat bit of paper and aligning one corner with the origin, and
then angling surface so that the end points of the vectors 𝑋 and 𝑐 are both resting on the card’s surface.
Keeping that alignment, any point on the surface of the card is reachable by some combination of 𝑋 and
𝑐. Algebraically we can refer to this surface as 𝑐𝑜𝑙(𝑋, 𝑐), and it generalises beyond two predictors (although
this is much harder to visualise).
Crucially, in our reduced example of three-dimensional space, there are points in space not reachable by
combining these two vectors (any point above or below the piece of card). We know, for instance that the
vector line 𝑦 lies off this plane. The goal therefore is to find a vector that is on the column space of (𝑋, 𝑐)
that gets closest to our off-plane vector 𝑦 as possible. Figure 3.3 depicts this set up visually – each dimension
is an observation, each column in the matrix is represented a vector, and the column space of (𝑋, 𝑐) is the
shaded grey plane. The vector 𝑦 lies off this plane.
From our discussion in Section 3.1, we know that the “best” vector is the orthogonal projection from the
column space to the vector 𝑦. This is the shortest possible distance between the flat plane and the observed
3 This final section borrows heavily from Ben Lambert’s explanation of projection and a demonstration using R by Andy
Eggers.

17
 Figure 3.2: Potential combinations of two vectors.

𝑋 + 𝑐
𝛼𝑋 + 𝛾𝑐

𝑐
𝑋

𝛼𝑋

outcome, and is just 𝑦.̂ Moreover, since 𝑦 ̂ lies on the column space, we know we only need to combine some
scaled amount of 𝑋 and 𝑐 to define the vector 𝑦,̂ i.e., 𝛽1 𝑋 + 𝛽0 𝑐. Figure 3.4 shows this geometrically. And
in fact, the scalar coefficients 𝛽1 , 𝛽0 in this case are just the regression coefficients derived from OLS. Why?
Because we know that the orthogonal projection of 𝑦 onto the column space minimises the error between our
prediction 𝑦 ̂ and the observed outcome vector 𝑦. This is the same as the minimisation problem that OLS
solves, as outlined at the beginning of this section!
Consider any other vector on the column space, and the distance between itself and and 𝑦. Each non-
orthogonal vector would be longer, and hence have a larger predictive error, than 𝑦.̂ For example, Figure
3.5 plots two alternative vectors on 𝑐𝑜𝑙(𝑋, 𝑐) alongside 𝑦.̂ Clearly, 𝜖 ̂ < 𝜖′ < 𝜖″ , and this is true of any other
vector on the column space too.
Hence, linear projection and linear regression can be seen (both algebraically and geometrically) to be solving
the same problem – minimising the (squared) distance between an observed vector 𝑦 and prediction vector
𝑦.̂ This demonstration generalises to many dimensions (observations), though of course it becomes much
harder to intuit the geometry of highly-dimensional data. And similarly, with more observations we could
also extend the number of predictors too such that 𝑋 is not a single column vector but a matrix of predictor
variables (i.e. multivariate regression). Again, visualising what the column space of this matrix would look
like geometrically becomes harder.
To summarise, this section has demonstrated two features. First, that linear regression simply is an orthogo-
nal projection. We saw this algebraically by noting that the derivation of OLS coefficients, and subsequently
the predicted values from a linear regression, is identical to 𝑃 𝑦 (where 𝑃 is a projection matrix). Second,
and geometrically, we intuited why this is the case: namely that projecting onto a lower-dimensional column
space involves finding the linear combination of predictors that minimises the Euclidean distance to 𝑦, i.e. 𝑦.̂
The scalars we use to do so are simply the regression coefficients we would generate using OLS regression.

18
Figure 3.3: Schematic of orthogonal projection as a geometric problem

19
Figure 3.4: Relation of orthogonal projection to linear regression.

20
Figure 3.5: Alternative vectors on the column space are further away from y.

21
22
Chapter 4

Weak Law of Large Numbers and Central

Limit Theorem

This chapter focuses on two fundamental theorems that form the basis of our inferences from samples to
populations. The Weak Law of Large Numbers (WLLN) provides the basis for generalisation from a sample
mean to the population mean. The Central Limit Theorem (CLT) provides the basis for quantifying our
uncertainty over this parameter. In both cases, I discuss the theorem itself and provide an annotated proof.
Finally, I discuss how the two theorems complement each other.

4.1 Weak Law of Large Numbers

4.1.1 Theorem in Plain English

Suppose we have a random variable 𝑋. From 𝑋, we can generate a sequence of random variables
𝑋1 , 𝑋2 , ..., 𝑋𝑛 that are independent and identically distributed (i.i.d.) draws of 𝑋. Assuming 𝑛 is finite, we
can perform calculations on this sequence of random numbers. For example, we can calculate the mean of
𝑛
the sequence 𝑋̄ 𝑛 = 𝑛1 ∑𝑖=1 𝑋𝑖 . This value is the sample mean – from a much wider population, we have
drawn a finite sequence of observations, and calculated the average across them. How do we know that this
sample parameter is meaningful with respect to the population, and therefore that we can make inferences
from it?
WLLN states that the mean of a sequence of i.i.d. random variables converges in probability to the expected
value of the random variable as the length of that sequence tends to infinity. By ‘converging in probability’,
we mean that the probability that the difference between the mean of the sample and the expected value of
the random variable tends to zero.
In short, WLLN guarantees that with a large enough sample size the sample mean should approximately
match the true population parameter. Clearly, this is powerful theorem for any statistical exercise: given
we are (always) constrained by a finite sample, WLLN ensures that we can infer from the data something
meaningful about the population. For example, from a large enough sample of voters we can estimate the
average support for a candidate or party.
More formally, we can state WLLN as follows:

𝑝
𝑋̄ 𝑛 −
→ 𝔼[𝑋], (4.1)

𝑝
where −
→ denotes ‘converging in probability’.

23
4.1.2 Proof

To prove WLLN, we use Chebyshev’s Inequality (CI). More specifically we first have to prove Chebyshev’s
Inequality of the Sample Mean (CISM), and then use CISM to prove WLLN. The following steps are based
on the proof provided in Aronow and Miller (2019).
Proof of Chebyshev’s Inequality of the Sample Mean. Chebyshev’s Inequality for the Sample Mean (CISM)
states that:

𝑣𝑎𝑟(𝑋)
𝑃 (|𝑋̄ 𝑛 − 𝔼[𝑋]| ≥ 𝑘) ≤ , (4.2)
𝑘2 𝑛

where 𝑋̄ 𝑛 is the sample mean of a sequensce of 𝑛 independent draws from a random variable 𝑋. Recall
CI states that 𝑃 (|(𝑋 − 𝜇)/𝜎| ≥ 𝑘) ≤ 𝑘12 . To help prove CISM, we can rearrange the left hand side of the
inequality by multiplying both sides of the inequality within the probability function by 𝜎, such that:

1
𝑃 (|(𝑋 − 𝜇)| ≥ 𝑘𝜎) ≤ . (4.3)
𝑘2

Then, finally, let us define 𝑘′ = 𝜎𝑘 . Hence:

𝑃 (|(𝑋̄ − 𝔼[𝑋])| ≥ 𝑘) = 𝑃 (|(𝑋̄ − 𝔼[𝑋])| ≥ 𝑘′ 𝜎) (4.4)

1
≤ 2 (4.5)
𝑘′
𝜎2
≤ 2 (4.6)
𝑘
𝑣𝑎𝑟(𝑋)̄
≤ (4.7)
𝑘2
𝑣𝑎𝑟(𝑋)
≤ □ (4.8)
𝑘2 𝑛

This proof is reasonably straightfoward. Using our definition of 𝑘′ allows us to us rearrange the probability
within CISM to match the form of the Chebyshev Inequality stated above, which then allows us to infer the
bounds of the probability. We then replace 𝑘′ with 𝜎𝑘 , expand and simplify. The move made between the
penultimate and final line relies on the fact that variance of the sample mean is equal to the variance in the
random variable divided by the sample size (n).1
Applying CISM to WLLN proof. Given that all probabilities are non-negative and CISM, we can now write:

𝑣𝑎𝑟(𝑋)
0 ≤ 𝑃 (|𝑋̄ 𝑛 − 𝔼[𝑋]| ≥ 𝑘) ≤ . (4.9)
𝑘2 𝑛

Note that for the first and third term of this multiple inequality, as 𝑛 approaches infinity both terms approach
0. In the case of the constant zero, this is trivial. In the final term, note that 𝑣𝑎𝑟(𝑋) denotes the inherent
variance of the random variable, and therefore is constant as 𝑛 increases. Therefore, as the denominator
increases, the term converges to zero.
Since the middle term is sandwiched in between these two limits, by definition we know that this term must
also converge to zero.2 Therefore:
1 SeeAronow and Miller 2019, p.98.
2 Tosee why this is the case, given the limits of the first and third terms, Equation ?? is of the form 0 ≤ 𝐴 ≤ 0 as 𝑛 → ∞.
The only value of 𝐴 that satisfies this inequality is 0.

24
 lim𝑛→∞ 𝑃 (|𝑋̄ 𝑛 − 𝔼[𝑋]| ≥ 𝑘) = 0 □ (4.10)

Hence, WLLN is proved: for any value of 𝑘, the probability that the difference between the sample mean
and the expected value is greater or equal to 𝑘 converges on zero. Since 𝑘’s value is arbitrary, it can be set
to something infinitesimally small, such that the sample mean and expected value converge in value.

4.2 Central Limit Theorem

WLLN applies to the value of the statistic itself (the mean value). Given a single, n-length sequence drawn
from a random variable, we know that the mean of this sequence will converge on the expected value of the
random variable. But often, we want to think about what happens when we (hypothetically) calculate the
mean across multiple sequences i.e. expectations under repeat sampling.
The Central Limit Theorem (CLT) is closely related to the WLLN. Like WLLN, it relies on asymptotic
properties of random variables as the sample size increases. CLT, however, lets us make informative claims
about the distribution of the sample mean around the true population parameter.

4.2.1 Theorem in Plain English

CLT states that as the sample size increases, the distribution of sample means converges to a normal
distribution. That is, so long as the underlying distribution has a finite variance (bye bye Cauchy!), then
irrespective of the underlying distribution of 𝑋 the distribution of sample means will be a normal distribution!
In fact, there are multiple types of CLT that apply in a variety of different contexts – cases including
Bernoulli random variables (de Moivre - Laplace), where random variables are independent but do not need
to be identically distributed (Lyapunov), and where random variables are vectors in ℝ𝑘 space (multivariate
CLT).
In what follows, I will discuss a weaker, more basic case of CLT where we assume random variables are
scalar, independent, and identically distributed (i.e. drawn from the same unknown distribution function).
In particular, this section proves that the standardized difference between the sample mean and population
mean for i.i.d. random variables converges in distribution to the standard normal distribution 𝑁 (0, 1). This
variant of the CLT is called the Lindeberg-Levy CLT, and can be stated as:

𝑋̄ 𝑛 − 𝜇 𝑑
√ −
→ 𝑁 (0, 1), (4.11)
𝜎 𝑛

𝑑
where −
→ denotes ‘converging in distribution’.
In general, the CLT is useful because proving that the sample mean is normally distributed allows us to
quantify the uncertainty around our parameter estimate. Normal distributions have convenient properties
that allow us to calculate the area under any portion of the curve, given just the same mean and standard
deviation. We already know by WLLN that the sample mean will (with a sufficiently large sample) approx-
imate the population mean, so we know that the distribution is also centred around the true population
mean. By CLT, the dispersion around that point is therefore normal, and to quantify the probable bounds
of the point estimate (under the assumption of repeat sampling) requires only an estimate of the variance.

4.2.2 Primer: Characteristic Functions

CLT is harder (and lengthier) to prove than other proofs we’ve encountered so far – it relies on showing that
the sample mean converges in distribution to a known mathematical form that uniquely and fully describes

25
the normal distribution. To do so, we use the idea of a characteristic functions, which simply denotes a
function that completely defines a probability function.
For example, and we will use this later on, we know that the characteristic function of the normal distribution
𝜎2 𝑡2 𝑡2
is 𝑒𝑖𝑡𝜇− 2 . A standard normal distriibution (where 𝜇 = 0, 𝜎2 = 1) therefore simplifies to 𝑒− 2 .
More generally, we know that for any scalar random variable 𝑋, the characteristic function of 𝑋 is defined
as:

𝜙𝑋 (𝑡) = 𝔼[𝑒𝑖𝑡𝑋 ], (4.12)

where 𝑡 ∈ ℝ and 𝑖 is the imaginary unit. Proving why this is the case is beyond the purview of this section,
so unfortunately I will just take it at face value.
𝑥2 𝑥3
We can expand 𝑒𝑖𝑡𝑋 as an infinite sum, using a Taylor Series, since 𝑒𝑥 = 1 + 𝑥 + 2! + 3! + .... Hence:

(𝑖𝑡𝑋)2 (𝑖𝑡𝑋)3
𝜙𝑋 (𝑡) = 𝔼[1 + 𝑖𝑡𝑋 + + + ...], (4.13)
2! 3!

Note that 𝑖2 = −1, and since the latter terms tend to zero faster than the second order term we can
summarise them as 𝑜(𝑡2 ) (they are no larger than of order 𝑡2 ). Therefore we can rewrite this expression as:

𝑡2 2
𝜙𝑋 (𝑡) = 𝔼[1 + 𝑖𝑡𝑋 − 𝑋 + 𝑜(𝑡2 )]. (4.14)
2

In the case of continuous random variables, the expected value can be expressed as the integral across all
space of the expression multiplied by the probability density, such that:

∞
𝑡2 2
𝜙𝑋 (𝑡) = ∫ [1 + 𝑖𝑡𝑋 − 𝑋 + 𝑜(𝑡2 )]𝑓𝑋 𝑑𝑋, (4.15)
−∞ 2

and this can be simplified to:

𝑡2
𝜙𝑋 (𝑡) = 1 + 𝑖𝑡𝔼[𝑋] − 𝔼[𝑋 2 ] + 𝑜(𝑡2 ), (4.16)
2

since 1×𝑓𝑋 = 𝑓𝑋 , the total area under a probability density necessarily sums to 1; ∫ 𝑋𝑓𝑋 𝑑𝑋 is the definition
of the expected value of X, and so by similar logic ∫ 𝑋 2 𝑓𝑋 𝑑𝑋 = 𝔼[𝑋 2 ].
In Ben Lambert’s video introducing the CLT proof, he notes that if we assume X has mean 0 and variance
1, the characteristic function of that distribution has some nice properties, namely that it simplifies to:

𝑡2
𝜙𝑋 (𝑡) = 1 − + 𝑜(𝑡2 ), (4.17)
2

since 𝔼[𝑋] = 0 cancelling the second term, and 𝔼[𝑋 2 ] ≡ 𝔼[(𝑋 − 0)2 ] = 𝔼[(𝑋 − 𝜇)2 ] = 𝑣𝑎𝑟(𝑋) = 1.
One final piece of characteristic function math that will help finalise the CLT proof is to note that if we
𝑛
define some random variable 𝑄𝑛 = ∑𝑖=1 𝑅𝑖 , where all 𝑅𝑖 are i.i.d., then the characteristic function of 𝑄𝑛
can be expressed as 𝜙𝑄𝑛 (𝑡) = [𝜙𝑅 (𝑡)]𝑛 . Again, I will not prove this property here.

26
4.2.3 Proof of CLT

This proof is based in part on Ben Lambert’s excellent YouTube series, as well as Lemons et al. (2002).
Given the above discussion of a characteristic function, let us assume a sequence of independent and identi-
cally distributed (i.i.d.) random variables 𝑋1 , 𝑋2 , ..., 𝑋𝑛 , each with mean 𝜇 and finite3 variance 𝜎2 . The sum
of these random variables has mean 𝑛𝜇 (since each random variable has the same mean) and the variance
equivalent to 𝑛𝜎2 (because the random variables are i.i.d. we know that 𝑣𝑎𝑟(𝐴, 𝐵) = 𝑣𝑎𝑟(𝐴)𝑣𝑎𝑟(𝐵)).
Now let’s consider the standardized difference between the actual sum of the random variables and the mean.
Standardization simply means dividing a parameter estimate by its standard deviation. In particular, we
can consider the following standardized random variable:

𝑛
∑𝑖=1 (𝑋𝑖 − 𝜇)
𝑍𝑛 = √ , (4.18)
𝜎 𝑛

where 𝑍𝑛 , in words, is the standardised difference between the sum of i.i.d. random variables and the
expected value of the sequence. Note that we use the known variance in the denominator.
We can simplify this further:

𝑛
1
𝑍𝑛 = ∑ √ 𝑌𝑖 , (4.19)
𝑖=1
𝑛

𝑋𝑖 −𝜇
where we define a new random variable 𝑌𝑖 = 𝜎 .

𝑌𝑖 has some convenient properties. First, since each random variable 𝑋𝑖 in our sample has mean 𝜇, we know
that 𝔼[𝑌𝑖 ] = 0 since 𝔼[𝑋𝑖 ] = 𝜇 and therefore 𝜇 − 𝜇 = 0. Note that this holds irrespective of the distribution
and value of 𝔼[𝑋𝑖 ].
The variance of 𝑌𝑖 is also recoverable. First note three basic features of variance: if 𝑎 is a constant, and 𝑋
and 𝑌 are random variables, 𝑣𝑎𝑟(𝑎) = 0; 𝑣𝑎𝑟(𝑎𝑋) = 𝑎2 𝑣𝑎𝑟(𝑋); and from the variance of a sum 𝑣𝑎𝑟(𝑋 −𝑌 ) =
𝑣𝑎𝑟(𝐴) − 𝑣𝑎𝑟(𝐵). Therefore:

1 1
𝑣𝑎𝑟( (𝑋𝑖 − 𝜇) = 2 𝑣𝑎𝑟(𝑋𝑖 − 𝜇) (4.20)
𝜎 𝜎
𝑣𝑎𝑟(𝑋𝑖 − 𝜇) = 𝑣𝑎𝑟(𝑋𝑖 ) − 𝑣𝑎𝑟(𝜇) (4.21)
= 𝑣𝑎𝑟(𝑋𝑖 ). (4.22)

Hence:

𝑣𝑎𝑟(𝑋𝑖 )
𝑣𝑎𝑟(𝑌𝑖 ) = = 1, (4.23)
𝜎2

since 𝑣𝑎𝑟(𝑋𝑖 ) = 𝜎2 .
At this stage, the proof is tantalisingly close. While we have not yet fully characterised the distribution of
𝑍𝑛 or even 𝑌𝑖 , the fact that 𝑌𝑖 has unit variance and a mean of zero means suggests we are on the right
track to proving that this does asymptotically tend in distribution to the standard normal. In fact, recall
from the primer on characteristic functions, that Lambert notes for any random variable with unit variance
2
and mean of 0, 𝜙𝑋 (𝑡) = 1 − 𝑡2 + 𝑜(𝑡2 ). Hence, we can now say that:
3 Hence why degenerate distributions like the Cauchy are not covered by CLT.

27
 𝑡2
𝜙𝑌𝑖 (𝑡) = 1 − + 𝑜(𝑡2 ). (4.24)
2
𝑛
Now let us return to 𝑍𝑛 = ∑𝑖=1 √1𝑛 𝑌𝑖 and using the final bit of characteristic function math in the primer,
we can express the characteristic function of 𝑍𝑛 as:

𝑡
𝜙𝑍𝑛 (𝑡) = [𝜙𝑌 ( √ )]𝑛 , (4.25)
𝑛

since 𝑌𝑖 is divided by the square root of the sample size. Given our previously stated expression of the
characteristic function of 𝑌𝑖 :

𝑡2
𝜙𝑍𝑛 (𝑡) = [1 − + 𝑜(𝑡2 )]]𝑛 . (4.26)
2𝑛

We can now consider what happens as 𝑛 → ∞. By definition, we know that 𝑜(𝑡2 ) converges to zero faster
than the other terms, so we can safely ignore it. As a result, and noting that 𝑒𝑥 = lim(1 + 𝑛𝑥 )𝑛 :

𝑡2
lim 𝜙𝑍𝑛 (𝑡) = 𝑒− 2 . (4.27)
𝑛→∞

This expression shows that as 𝑛 tends to infinity, the characteristic function of 𝑍𝑛 is the standard normal
distribution (as noted in the characteristic function primer). Therefore:

lim 𝑍𝑛 = 𝑁 (0, 1) (4.28)

𝑛→∞
𝑋̄ 𝑛 − 𝜇
lim √ = 𝑁 (0, 1). □ (4.29)
𝑛→∞ 𝜎 𝑛

The last line here simply follows from the definition of 𝑍𝑛 .

4.2.4 Generalising CLT

From here, it is possible to intuit the more general CLT that the distribution of sampling means is normally
2
distributed around the true mean 𝜇 with variance 𝜎𝑛 . Note this is only a pseudo-proof, because as Lambert
notes, multiplying through by 𝑛 is complicated by the limit operator with respect to 𝑛. However, it is useful
to see how these two CLT are closely related.
First, we can rearrange the limit expression using known features of the normal distribution:

𝑑
lim 𝑍𝑛 −
→ 𝑁 (0, 1) (4.30)
𝑛→∞
𝑛
∑𝑖=1 (𝑋𝑖 ) − 𝑛𝜇 𝑑
lim √ −
→ 𝑁 (0, 1) (4.31)
𝑛→∞ 𝑛𝜎2
𝑛
𝑑
→ 𝑁 (0, 𝑛𝜎2 )
lim ∑(𝑋𝑖 ) − 𝑛𝜇 − (4.32)
𝑛→∞
𝑖=1
𝑛
𝑑
→ 𝑁 (𝑛𝜇, 𝑛𝜎2 ),
lim ∑(𝑋𝑖 ) − (4.33)
𝑛→∞
𝑖=1

28
since 𝑎𝑁 (𝑏, 𝑐) = 𝑁 (𝑎𝑏, 𝑎2 𝑐), and 𝑁 (𝑑, 𝑒) + 𝑓 = 𝑁 (𝑑 + 𝑓, 𝑒).
At this penultimate step, we know that the sum of i.i.d. random variables is a normal distribution. To see
that the sample mean is also normally distributed, we simply divide through by 𝑛:

1 𝑛 𝑑 𝜎2
lim 𝑋̄ = ∑(𝑋𝑖 ) −
→ 𝑁 (𝜇, ). (4.34)
𝑛→∞ 𝑛 𝑖=1 𝑛

4.2.5 Limitation of CLT (and the importance of WLLN)

Before ending, it is worth noting that CLT is a claim with respect to repeat sampling from a population
(holding 𝑛 constant each time). It is not, therefore, a claim that holds with respect to any particular sample
draw. We may actually estimate a mean value that, while probable, lies away from the true population
parameter (by definition, since the sample means are normally distributed, there is some dispersion). Con-
structing uncertainty estimates using CLT on this estimate alone does not guarantee that we are in fact
capturing either the true variance or the true parameter.
That being said, with sufficiently high-N, we know that WLLN guarantees (assuming i.i.d. observations)
that our estimate converges on the population mean. WLLN’s asymptotics rely only on sufficiently large
sample sizes for a single sample. Hence, both WLLN and CLT are crucial for valid inference from sampled
data. WLLN leads us to expect that our parameter estimate will in fact be centred approximately near the
true parameter. Here, CLT can only say that across multiple samples from the population the distribution
of sample means is centred on the true parameter. With WLLN in action, however, CLT allows us to make
inferential claims about the uncertainty of this converged parameter.

29
30
Chapter 5

Slutsky’s Theorem

5.1 Theorem in plain English

Slutsky’s Theorem allows us to make claims about the convergence of random variables. It states that a
random variable converging to some distribution 𝑋, when multiplied by a variable converging in probability
on some constant 𝑎, converges in distribution to 𝑎 × 𝑋. Similarly, if you add the two random variables, they
𝑑 𝑝
→ 𝑋 and 𝐴𝑛 −
converge in distribution to 𝑎 plus 𝑋. More formally, the theorem states that if 𝑋𝑛 − →, where
𝑎 is a constant, then:
𝑑
1. 𝑋𝑛 + 𝐴𝑛 −
→𝑋+𝑎
𝑑
2. 𝐴𝑛 𝑋𝑛 −
→ 𝑎𝑋
Note that if 𝐴𝑛 or 𝐵𝑛 do not converge in probability to constants, and instead converge towards some
distribution, then Slutsky’s Theorem does not hold. More trivially, if all variables converge in probability
𝑝
to constants, then 𝐴𝑛 𝑋𝑛 + 𝐵𝑛 −
→ 𝑎𝑋 + 𝐵.

5.2 Coded demonstration

This theorem is reasonably intuitive. Suppose that the random variable 𝑋𝑛 converges in distribution to a
standard normal distribution 𝑁 (0, 1). For part 1) of the Theorem, note that when we multiply a standard
normal by a constant we “stretch” the distribution (assuming |𝑎| > 1, else we “compress” it). Recall from
the discussion of the standard normal in Chapter 5 that 𝑎𝑁 (0, 1) = 𝑁 (0, 𝑎2 ). As 𝑛 approaches infinity,
𝑝
therefore, by definition 𝐴𝑛 −
→ 𝑎, and so the degree to which the standard normal is stretched will converge
to that constant too. To demonstrate this feature visually, consider the following simulation:
library(ggplot2)
set.seed(89)
N <- c(10,20,500)

results <- data.frame(n = as.factor(levels(N)),

X_n = as.numeric(),
A_n = as.numeric(),
ax = as.numeric())

for (n in N) {
X_n <- rnorm(n)

31
 A_n <- 2 + exp(-n)
aX <- A_n * X_n

results <- rbind(results, cbind(n, X_n, A_n, aX))

ggplot(results, aes(x = aX)) +

facet_wrap(n~., ncol = 3, labeller = "label_both") +
geom_density() +
labs(y = "p(aX)")

n: 10 n: 20 n: 500
0.20

0.15
p(aX)

0.10

0.05

0.00

−6 −3 0 3 6 −6 −3 0 3 6 −6 −3 0 3 6
aX
Here we have defined two random variables: X_n is a standard normal, and A_n converges in value to 2.
Varying the value of n, I take 𝑛 draws from a standard normal distribution and calculate the value the
converging constant 𝐴𝑛 . I then generate the product of these two variables. The figure plots the resulting
distribution aX. We can see that as n increases, the distribution becomes increasingly normal, remains
centred around 0 and the variance approaches 4 (since 95% of the curve is approximately bounded between
0 ± 2 × √𝑣𝑎𝑟(𝑎𝑋) = 0 ± 2 × 2 = 0 ± 4).
Similarly, if we add the constant 𝑎 to a standard distribution, the effect is to shift the distribution in its
entirety (since a constant has no variance, it does not ‘’stretch” the distribution). As 𝐴𝑛 converges in
probability, therefore, the shift converges on the constant 𝑎. Again, we can demonstrate this result in R:
library(ggplot2)
set.seed(89)
N <- c(10,20,500)

results <- data.frame(n = as.factor(levels(N)),

32
 X_n = as.numeric(),
A_n = as.numeric(),
a_plus_X= as.numeric())

for (n in N) {
X_n <- rnorm(n)
A_n <- 2 + exp(-n)
a_plus_X <- A_n + X_n

results <- rbind(results, cbind(n, X_n, A_n, a_plus_X))

ggplot(results, aes(x = a_plus_X)) +

facet_wrap(n~., ncol = 3, labeller = "label_both") +
geom_density() +
geom_vline(xintercept = 2, linetype = "dashed") +
labs(y = "p(a+X)", x="a+X")

n: 10 n: 20 n: 500
0.4

0.3
p(a+X)

0.2

0.1

0.0

−1 0 1 2 3 4 5 −1 0 1 2 3 4 5 −1 0 1 2 3 4 5
a+X

As n becomes larger, the resulting distribution becomes approximately normal, with variance of 1 and a
mean value centred around 0 + 𝑎 = 2.

Slutsky’s Theorem is so useful precisely because it allows us to combine multiple random variables with
known asymptotics, and retain this knowledge i.e. we know what the resultant distribution will converge to
assuming 𝑛 → ∞.

33
5.3 Proof of Slutsky’s Theorem

Despite the intuitive appeal of Slutsky’s Theorem, the proof is less straightforward. It relies on the continuous
mapping theorem (CMT), which in turns rests on several other theorems such as the Portmanteau Theorem.
To avoid the rabbit hole of proving all necessary antecedent theorems, I simply introduce and state the
continuous mapping theorem (CMT) here, and then show how this can be used to prove Slutsky’s Theorem.

5.3.1 CMT

𝑑
The continuous mapping theorem states that if there is some random variable such that 𝑋𝑛 −
→ 𝑋, then
𝑑
𝑔(𝑋𝑛 ) −
→ 𝑔(𝑋), so long as 𝑔 is a continuous function. In approximate terms (which are adequate for our
purpose), a continuous function is one in which for a given domain the function can be represented as an
single unbroken curve (or hyperplane in many dimensions). For example, consider the graph of 𝑓(𝑥) = 𝑥−1 .
For the domain 𝐷+ ∶ ℝ > 0, this function is continuous. But for the domain 𝐷∞ ∶ ℝ, the function is
discontinuous because the function is undefined when 𝑥 = 0.

In short, CMT states that a continuous function preserves the asymptotic limits of a random variable. More
𝑑
broadly (and again, I do not prove this here), CMT entails that 𝑔(𝑃𝑛 , 𝑄𝑛 , ..., 𝑍𝑛 ) −
→ 𝑔(𝑃 , 𝑄, ..., 𝑍) if all
𝑃𝑛 , 𝑄𝑛 , ... etc. converge in distribution to 𝑃 , 𝑄, ... respectively.

5.3.2 Proof using CMT

𝑑
How does this help prove Slutsky’s Theorem? We know by the definitions in Slutsky’s Theorem that 𝑋𝑛 −
→𝑋
𝑑 𝑝
and, by a similar logic, we know that 𝐴𝑛 −
→ 𝑎 (since 𝐴𝑛 −
→ 𝑎, and converging in probability entails converging
𝑑 𝑑
in distribution). So we can note that the joint vector (𝑋𝑛 , 𝐴𝑛 ) −
→ (𝑋, 𝑎). By CMT, therefore, 𝑔(𝑋𝑛 , 𝐴𝑛 ) −
→
𝑔(𝑋, 𝑎). Hence, any continuous function 𝑔 will preserve the limits of the respective distributions.

Given this result, it is sufficient to note that both addition and multiplication are continuous functions.
Again, I do not show this here but the continuity of addition and multiplication (both scalar and vector) can
be proved mathematically (for example see one such proof here For an intuitive explanation, think about the
diagonal line 𝑦 = 𝑋 – any multiplication of that line is still a single, uninterrupted line (𝑦 = 𝑎𝑋) assuming
𝑎 is a constant. Similarly, adding a constant to the function of a line also yields an uninterrupted line
(e.g. 𝑦 = 𝑋 + 𝑎).

Hence, CMT guarantees both parts 1 and 2 of the Theorem. □

5.4 Applications

Slutsky’s Theorem is a workhorse theorem that allows researchers to make claims about the limiting distri-
butions of multiple random variables. Instead of being used in applied settings, it typically underpins the
modelling strategies used in applied research. For example, Aronow and Samii (2016) consider the problem
of weighting multiple regression when the data sample is unrepresentative of the population of interest. In
their proofs, they apply Slutsky’s Theorem at two different points to prove that their weighted regression esti-
mates converge in probability on the weighted expectation of individual treatment effects, and subsequently,
that the same coefficient converges in probability to the true average treatment effect in the population.

34
5.4.1 Proving the consistency of sample variance, and the normality of the t-statistic

In the remainder of this chapter, I consider applications of both Central Mapping Theorem and Slutsky’s
Theorem in fundamental statistical proofs. I first show how CMT can be used to prove the consistency of
the variance of a random variable, and subsequently how in combination with Slutsky’s Theorem this helps
prove the normality of a t-statistic. These examples are developed from David Hunter’s notes on asymptotic
theory that accompany his Penn State course in large-sample theory.

5.4.1.1 Consistency of the sample variance estimator

First, let us define the sample variance (𝑠2𝑛 ) of a sequence of i.i.d random variables drawn from a distribution
𝑋 with 𝔼[𝑋] = 𝜇 and 𝑣𝑎𝑟(𝑋) = 𝜎2 as:

𝑛
1
𝑠2𝑛 = ∑(𝑋𝑖 − 𝑋𝑛̄ )2 .
𝑛 − 1 𝑖=1

We can show that the sample variance formula above is a consistent estimator of the true variance 𝜎2 . That
is, as the sequence of i.i.d. random variables 𝑋1 , 𝑋2 , ... increases in length, the sample variance estimator of
that sequence converges in probability to the true variance value 𝜎2 .

We can prove this by redefining 𝑠2 as follows:

𝑛 1 𝑛
𝑠2𝑛 = [ ∑(𝑋𝑖 − 𝜇)2 − (𝑋𝑛̄ − 𝜇)2 ] ,
𝑛 − 1 𝑛 𝑖=1

which clearly simplifies to the conventional definition of 𝑠2 as first introduced.

𝑝 𝑝
From here, we can note using WLLN, that (𝑋𝑛̄ − 𝜇) −
→ 0, and hence that (𝑋𝑛̄ − 𝜇)2 −
→ 0. Note that this
𝑛 𝑝
1
term converges in probability to a constant. Moreover, 𝑛 → 𝔼[𝑋𝑖 − 𝜇] = 𝑣𝑎𝑟(𝑋) = 𝜎2 , by
∑𝑖=1 (𝑋𝑖 − 𝜇)2 −
definition.
𝑝 𝑝
Now let us define an arbitrary continuous function 𝑔(𝐴𝑛 , 𝐵𝑛 ). We know by CMT that if 𝐴𝑛 −
→ 𝐴, 𝐵𝑛 −
→𝐵
𝑝
then 𝑔(𝐴𝑛 , 𝐵𝑛 ) −
→ 𝑔(𝐴, 𝐵). And hence, using the implications above we know that for any continuous
𝑛 𝑝
function 𝑔 that 𝑔( 1 ∑ (𝑋𝑖 − 𝜇)2 , (𝑋𝑛̄ − 𝜇)) −
𝑛 𝑖=1
→ 𝑔(𝜎2 , 0).

Since subtraction is a continuous function, we therefore know that:

1 𝑛 𝑝
[ ∑(𝑋 − 𝜇)2 − (𝑋𝑛̄ − 𝜇)2 ] −
→ [𝜎2 − 0] = 𝜎2 .
𝑛 𝑖=1 𝑖

𝑝
𝑛
Separately we can intuitively see that 𝑛−1 −
→ 1. Hence, by applying CMT again to this converging variable
multiplied by the converging limit of the above (since multiplication is a continuous function), we can see
that:

𝑝
→ 1 × 𝜎2 = 𝜎2 □
𝑠2𝑛 −

35
5.4.1.2 Normality of the t-statistic

Let’s define a t-statistic as:

√
𝑛(𝑋̄ 𝑛 − 𝜇)
𝑡𝑛 =
√𝜎2̂

By the Central Limit Theorem (CLT, Chapter 5), we know that for a random variable 𝑋 with mean 𝜇 and
√ 𝑑
variance 𝜎2 that 𝑛(𝑋̄ 𝑛 − 𝜇) −
→ 𝑁 (0, 𝜎2 ).
𝑝
We also know from the proof above that if 𝜎̂ 2 = 𝑠2 then 𝜎̂ 2 −
→ 𝜎2 – a constant. Given this, we can also note
𝑝
1 1
that −
→ 𝜎2 .
𝜎2̂

Hence, by Slutsky’s Theorem:

√ 1 𝑑 1
𝑛(𝑋̄ 𝑛 − 𝜇) × √ − → 𝑁 (0, 𝜎2 ) × √ (5.1)
𝜎 2 𝜎2
1
= 𝜎𝑁 (0, 1) × (5.2)
𝜎
= 𝑁 (0, 1) □ (5.3)

One brief aspect of this proof that is noteworthy is that since Slutsky’s Theorem rests on the CMT, the
application of Slutsky’s Theorem requires that the function of the variables 𝑔 (in this case multiplication)
is continuous and defined for the specified domain. Note that 10 is undefined and therefore that the above
proof only holds when we assume 𝜎2 > 0. Hence why in many statistics textbooks and discussions of model
asymptotics, authors note that they must assume a positive, non-zero variance.

36
Chapter 6

Big Op and little op

6.1 Stochastic order notation

“Big Op” (big oh-pee), or in algebraic terms 𝑂𝑝 , is a shorthand means of characterising the convergence in
probability of a set of random variables. It directly builds on the same sort of convergence ideas that were
discussed in Chapters 4 and 5.
Big Op means that some given random variable is stochastically bounded. If we have some random variable
𝑋𝑛 and some constant 𝑎𝑛 (where n indexes both sets), then

𝑋𝑛 = 𝑂𝑝 (𝑎𝑛 )
is the same as saying that
𝑋𝑛
𝑃 (| | > 𝛿) < 𝜖, ∀𝑛 > 𝑁 .
𝑎𝑛
𝛿 and 𝑁 here are just finite numbers, and 𝜖 is some arbitrary (small) number. In plain English, 𝑂𝑝 means
that for a large enough 𝑛 there is some number (𝛿) such that the probability that the random variable 𝑋 𝑛
𝑎𝑛
is larger than that number is essentially zero. It is “bounded in probability” (van der Vaart, 1998, Section
2.2).
“Little op” (litle oh-pee), or 𝑜𝑝 , refers to convergence in probability towards zero. 𝑋𝑛 = 𝑜𝑝 (1) is the same as
saying

lim (𝑃 |𝑋𝑛 | ≥ 𝜖) = 0, ∀𝜖 > 0.

𝑛→∞

By definition of the notation, if 𝑋𝑛 = 𝑜𝑝 (𝑎𝑛 ) then

𝑥𝑛
= 𝑜𝑝 (1).
𝑎𝑛

In turn, we can therefore express 𝑋𝑛 = 𝑜𝑝 (𝑎𝑛 ) as

𝑋𝑛
lim (𝑃 | | ≥ 𝜖) = 0, ∀𝜖 > 0.
𝑛→∞ 𝑎𝑛
𝑝
𝑋𝑛
In other words, 𝑋𝑛 = 𝑜𝑝 (𝑎𝑛 ) if and only if 𝑎𝑛 −
→ 0.

37
6.1.1 Relationship of big-O and little-o

𝑂𝑝 and 𝑜𝑝 may seem quite similar, and that’s because they are! Another way to express 𝑋𝑛 = 𝑂𝑝 (𝑎𝑛 ), is

𝑋𝑛
∀𝜖 ∃𝑁𝜖 , 𝛿𝜖 𝑠.𝑡.∀𝑛 > 𝑁𝜖 , 𝑃 (| | ≥ 𝛿𝜖 ) ≤ 𝜖.
𝑎𝑛
This restatement makes it clear that the values of 𝛿 and 𝑁 are to be found with respect to 𝜖. That is, we
only have to find one value of 𝑁 and 𝛿 for each 𝑒𝑝𝑠𝑖𝑙𝑜𝑛, and these can differ across 𝜖’s.
Using the same notation, 𝑋𝑛 = 𝑜𝑝 (𝑎𝑛 ) can be expressed as

𝑋𝑛
∀𝜖, 𝛿 ∃𝑁𝜖,𝛿 𝑠.𝑡.∀𝑛 > 𝑁𝜖,𝛿 , 𝑃 (| | ≥ 𝛿) ≤ 𝜖.
𝑎𝑛
𝑜𝑝 is therefore a more general statement, ranging over all values of 𝜖 and 𝛿, and hence any combination of
those two values. In other words, for any given pair of values for 𝜖 and 𝛿 there must be some 𝑁 that satisfies
the above inequality (assuming 𝑋𝑛 = 𝑜𝑝 (𝑎𝑛 )).
Note also, therefore that 𝑜𝑝 (𝑎𝑛 ) entails 𝑂𝑝 (𝑎𝑛 ), but that the inverse is not true. If for all 𝜖 and 𝛿 there is
some 𝑁𝜖,𝛿 that satisfies the inequality, then it must be the case that for all 𝜖 there exists some 𝛿 such that
the inequality also holds. But just because for some 𝛿𝜖 the inequality holds, this does not mean that it will
hold for all 𝛿.

6.2 Notational shorthand and “arithmetic” properties

Expressions like 𝑋𝑛 = 𝑜𝑝 ( √1𝑛 ) do not contain literal identities. Big and little o are merely shorthand ways
of expressing how some random variable converges (either to a bound or zero). Suppose for instance that
we know 𝑋𝑛 = 𝑜𝑝 ( 𝑛1 ). We also therefore know that 𝑋𝑛 = 𝑜𝑝 ( 𝑛0.5 1
). Analogously, think about an object
accelerating at a rate of at least 10𝑚𝑠 – that car is also accelerating at a rate at least 5𝑚𝑠−2 . But it’s not
−2

the case that 𝑜𝑝 ( 𝑛1 ) = 𝑜𝑝 ( √1𝑛 ). For instance a car accelerating at least as fast as 5𝑚𝑠−2 is not necessarily
accelerating at least as fast as 10𝑚𝑠−2 .
Hence, when we use stochastic order notation we should be careful to think of it as implying something
rather than making the claim that some random variable or expression involving random variables equals
some stochastic order.
That being said, we can note some simple implications of combining 𝑂𝑝 and/or 𝑜𝑝 terms, including:
• 𝑜𝑝 (1) + 𝑜𝑝 (1) = 𝑜𝑝 (1) – this is straightforward: two terms that both converge to zero at the same
rate, collectively converge to zero at that rate. Note this is actually just an application of Continuous
𝑝 𝑝
Mapping Theorem, since If 𝑋𝑛 = 𝑜𝑝 (1), 𝑌𝑛 = 𝑜𝑝 (1) then 𝑋𝑛 −
→ 0, 𝑌𝑛 −
→ 0 then the addition of these
𝑝
two terms is a continuous mapping function, and therefore 𝑋𝑛 + 𝑌𝑛 −
→ 0, ∴𝑋𝑛 + 𝑌𝑛 = 𝑜𝑝 (1).
• 𝑂𝑝 (1) + 𝑜𝑝 (1) = 𝑂𝑝 (1) – a term that is bounded in probability (𝑂𝑝 (1)) plus a term converging in
probability to zero, is bounded in probability.
• 𝑂𝑝 (1)𝑜𝑝 (1) = 𝑜𝑝 (1) – a bounded probability multiplied by a term that converges (in the same order)
to zero itself converges to zero.
• 𝑜𝑝 (𝑅) = 𝑅 × 𝑜𝑝 (1) – again this is easy to see, since suppose 𝑋𝑛 = 𝑜𝑝 (𝑅), then 𝑋𝑛 /𝑅 = 𝑜𝑝 (1), and so
𝑋𝑛 = 𝑅𝑜𝑝 (1).
Further rules, and intuitive explanations for their validity, can be found in Section 2.2 of van der Vaart
(1998). The last rule above, however, is worth dwelling on briefly since it makes clear why we use different
rate terms (𝑅) in the little-o operator. Consider two rates 𝑅(1) = √1𝑛 , 𝑅(2) = √
1
3 , and some random variable
2

38
 𝑝
𝑌𝑛 −
→ 0, that is 𝑌𝑛 = 𝑜𝑝 (1). Given the final rule (and remembering the equals signs should not be read
(1)
literally), if 𝑋𝑛 = 𝑜𝑝 (𝑅(1) ), then

(1) 1
𝑋𝑛 = √ × 𝑌𝑛 ,
𝑛
(2)
and if 𝑋𝑛 = 𝑜𝑝 (𝑅(2) ), then

(2) 1
𝑋𝑛 = √ × 𝑌𝑛 .
3
𝑛
(1) (2) (2)
For each value of 𝑌𝑛 as 𝑛 approaches infinity, 𝑋𝑛 is bigger than 𝑋𝑛 . In other words, 𝑋𝑛 will converge in
probably towards zero faster. This implication of the notation, again,

6.3 Why is this useful?1

A simple (trivial) example of this notation is to consider a sequence of random variables 𝑋𝑛 with known
𝔼[𝑋𝑛 ] = 𝑋. We can therefore decompose 𝑋𝑛 = 𝑋 +𝑜𝑝 (1), since we know by the Weak Law of Large Numbers
𝑝
that 𝑋𝑛 −→ 𝑋. This is useful because, without having to introduce explicit limits into our equations, we
know that with a sufficiently large 𝑛, the second term of our decomposition converges to zero, and therefore
we can (in a hand-wavey fashion) ignore it.
Let’s consider a more meaningful example. Suppose now that 𝑋𝑛 ∼ 𝑁 (0, 𝑛). Using known features of normal
distributions, we can rearrange this to

𝑋
√𝑛 ∼ 𝑁 (0, 1).
𝑛
There exists some 𝑀 such that the probability that a value from 𝑁 (0, 1) exceeds 𝑀 is less than 𝜖 > 0, and
therefore

√
𝑋𝑛 = 𝑂𝑝 ( 𝑛).

𝑋𝑛 is also little-op of 𝑛 since

𝑋𝑛 𝑛
∼ 𝑁 (0, 2 )
𝑛 𝑛
1
∼ 𝑁 (0, )
𝑛

And so we just need to prove the righthand side above is 𝑜𝑝 (1). To do so note that:

1 1
𝑃 (|𝑁 (0, )| > 𝜖) = 𝑃 ( √ |𝑁 (0, 1)| > 𝜖)
𝑛 𝑛
√ 𝑝
= 𝑃 (|𝑁 (0, 1)| > 𝑛𝜖) − → 0.
√
The last follows since 𝑛 → ∞, and so the probability that the standard normal is greater than ∞ decreases
to zero. Hence 𝑋𝑛 = 𝑜𝑝 (𝑛).
1 Thefirst two examples in this section are adapted from Ashesh Rambachan’s Asymptotics Review lecture slides, from
Harvard Math Camp – Econometrics 2018.

39
 𝑁 (0, 𝑛1 )
lim 𝑃 (∣ ∣ ≥ 𝜖) = 0 = 𝑜𝑝 (1),
𝑛→∞ 𝑛

for all 𝜖 > 0, and therefore that

𝑋𝑛 = 𝑜𝑝 (𝑛)
.
The big-O, little-o notation captures the complexity of the equation or, equivalently, the rate at which it
converges. One way to read 𝑋𝑛 = 𝑜𝑝 (𝑎𝑛 ) is that, for any multiple of 𝑗, 𝑋𝑛 converges in probability to zero
at the rate determined by 𝑎𝑛 . So, for example, 𝑜𝑝 (𝑎2𝑛 ) converges faster than 𝑜𝑝 (𝑎𝑛 ), since for some random
variable 𝑋𝑛 , 𝑋 𝑋𝑛
𝑎2 < 𝑎 , 𝑛 > 1.
𝑛
𝑛 𝑛

When we want to work out the asymptotic limits of a more complicated equation, where multiple terms are
affected by the number of observations, if we have a term that converges in probability to zero at a faster
rate than others then we can safely ignore that term.

6.4 Worked Example: Consistency of mean estimators

A parameter is “consistent” if it converges in probability to the true parameter as the number of observations
increases. More formally, a parameter estimate 𝜃 ̂ is consistent if

𝑝
𝑃 (|𝜃 ̂ − 𝜃| ≥ 𝜖) −
→ 0,
where 𝜃 is the true parameter.
One question we can ask is how fast our consistent parameter estimate converges on the true parameter
value. This is an “applied” methods problem to the extent that, as researchers seeking to make an inference
about the true parameter, and confronted with potentially many ways of estimating it, we want to choose
an efficient estimator i.e. one that gets to the truth quickest!
Let’s suppose we want to estimate the population mean of 𝑋, i.e. 𝑋.̄ Suppose further we have two potential
𝑁
estimators, the sample mean is 𝑁1 ∑𝑖=1 𝑋𝑖 and the median is 𝑋(𝑁+1)/2 , where 𝑁 = 2𝑛 + 1 (we’ll assume
an odd number of observations for the ease of calculation) and 𝑋 is an ordered sequence from smallest to
largest.
We know by the Central Limit Theorem that the sample mean

2
𝜎
𝑋̄ 𝑁 ∼ 𝒩(𝜃, ),
𝑁

and note that I use 𝒩 to denote the normal distribution function, to avoid confusion with the total number
of observations 𝑁 .
Withholding the proof, the large-sample distribution of the median estimator can be expressed approxi-
mately2 as

𝜋𝜎2
Med(𝑋1 , 𝑋2 , ..., 𝑋𝑁 ) ∼ 𝒩(𝜃, ).
2𝑁
2 See this Wolfram MathWorld post for more information about the exact CLT distribution of sample medians.

40
How do these estimators perform in practice? Let’s first check this via Monte Carlo, by simulating draws
of a standard normal distribution with various sizes of N and plotting the resulting distribution of the two
estimators:
library(tidyverse)
library(ccaPP) # This pkg includes a fast algorithm for the median

# Compute sample mean and median 1000 times, using N draws from std. normal
rep_sample <- function(N) {
sample_means <- c()
sample_medians <- c()
for (s in 1:1000) {
sample <- rnorm(N)
sample_means[s] <- mean(sample)
sample_medians[s] <- fastMedian(sample)
}
return(data.frame(N = N, Mean = sample_means, Median = sample_medians))
}

set.seed(89)
Ns <- c(5,seq(50,250, by = 50)) # A series of sample sizes

# Apply function and collect results, then pivot dataset to make plotting easier
sim_results <- do.call("rbind", lapply(Ns, FUN = function(x) rep_sample(x))) %>%
pivot_longer(-N, names_to = "Estimator", values_to = "estimate")

ggplot(sim_results, aes(x = estimate, color = Estimator, fill = Estimator)) +

facet_wrap(~N, ncol = 2, scales = "free_y", labeller = "label_both") +
geom_density(alpha = 0.5) +
labs(x = "Value", y = "Density") +
theme(legend.position = "bottom")

41
 N: 5 N: 50

0.75
2
0.50
0.25 1

0.00 0
N: 100 N: 150
4 5
4
Density

3
3
2
2
1 1
0 0
N: 200 N: 250
6
4 4

2 2

0 0
−2 −1 0 1 −2 −1 0 1
Value

Estimator Mean Median

Here we can see that for both the mean and median sample estimators, the distribution of parameters is
normally distributed around the true mean (𝜃 = 0). The variance of the sample mean distribution, however,
shrinks faster than that of the sample median estimator. In other words, the sample mean is more “efficient”
(in fact it is the most efficient estimator). Efficiency here captures what we noted mathematically above –
that the rate of convergence on the true parameter (i.e. the rate at which the estimator converges on zero)
is faster for the sample mean than the median.
Note that both estimators are therefore unbiased (they are centred on 𝜃), normally distributed, and are
consistent (the sampling distributions shrink towards the true parameter as N increases), but that the
variances shrinks at slightly different rates.
We can quantify this using little-o notation and the behaviour of these estimators with large-samples. First,
we can define the estimation errors of the mean and median respectively as

𝜓Mean = 𝜃 ̂ − 𝜃
𝜎2
= 𝒩(𝜃, ) − 𝒩(𝜃, 0)
𝑁
𝜎2
= 𝒩(0, ).
𝑁
Similarly,

𝜋𝜎2
𝜓Med. = 𝒩(𝜃, ) − 𝒩(𝜃, 0)
2𝑁
𝜋𝜎2
= 𝒩(0, ).
2𝑁
With both mean and median expressions, we can see that the error of the estimators is centered around zero

42
(i.e. it is unbiased), and that the dispersion of the error around zero decreases as 𝑁 increases. Given earlier
discussions in this chapter, we can rearrange both to find out their rate of convergence.
For the sample mean:

1
𝜓Mean = √ 𝒩(0, 𝜎2 )
𝑁
𝜓Mean
= 𝒩(0, 𝜎2 )
𝑁 −0.5

We know that for a normal distribution, there will be some 𝑀𝜖 , 𝑁𝜖 , such that 𝑃 (|𝒩(0, 𝜎2 )| ≥ 𝑀𝜖 ) < 𝜖, and
hence:

1
𝜓Mean = 𝑂𝑝 ( √ ).
𝑁
Similarly, for the sample median:

𝜋𝜎2
𝜓Med. = 𝒩(0, )
2𝑁
𝜋 0.5
=( ) 𝒩(0, 𝜎2 )
2𝑁
𝜋 0.5
𝜓Med. / ( ) = 𝒩(0, 𝜎2 )
2𝑁
𝜋 0.5
𝜓Med. = 𝑂𝑝 ([ ] )
2𝑁
√
𝜋
= 𝑂𝑝 ( √ ).
2𝑁

Now we can see that the big-op of the sample median’s estimating error is “slower” (read: larger) than
the big-op of the sample mean, meaning that the sample mean converges on the true parameter with fewer
observations than the sample median.
Another, easy way to see the intuition behind this point is to note that at intermediary steps in the above
rearrangements:

1
𝜓Mean = √ 𝒩(0, 𝜎2 )
𝑁
√
𝜋
𝜓Med. = √ 𝒩(0, 𝜎2 ),
2𝑁
and so, for any sized sample, the estimating error of the median is larger than that of the mean. To visualise
this, we can plot the estimation error as a function of 𝑁 using the rates derived above:
N <- seq(0.01,100, by = 0.01)
mean_convergence <- 1/sqrt(N)
median_convergence <- sqrt(pi)/sqrt(2*N)

plot_df <- data.frame(N, Mean = mean_convergence, Median = median_convergence) %>%

pivot_longer(-N, names_to = "Estimator", values_to = "Rate")

ggplot(plot_df, aes(x = N, y = Rate, color = Estimator)) +

geom_line() +
ylim(0,1) +
theme(legend.position = "bottom")

43
 Figure 6.1: Simulated distribution of sample mean and median estimators for different sized samples.

1.00

0.75
Rate

0.50

0.25

0.00

0 25 50 75 100
N

Estimator Mean Median

Note that the median rate line is always above the mean line for all 𝑁 (though not by much) – it therefore
has a slower convergence.

44
Chapter 7

Delta Method

7.1 Delta Method in Plain English

The Delta Method (DM) states that we can approximate the asymptotic behaviour of functions over a
random variable, if the random variable is itself asymptotically normal. In practice, this theorem tells us
that even if we do not know the expected value and variance of the function 𝑔(𝑋) we can still approximate
it reasonably. Note that by Central Limit Theorem we know that several important random variables and
estimators are asymptotically normal, including the sample mean. We can therefore approximate the mean
and variance of some transformation of the sample mean using its variance.
More specifically, suppose that we have some sequence of random variables 𝑋𝑛 , such that as 𝑛 → ∞

𝜎2
𝑋𝑛 ∼ 𝑁 (𝜇, ).
𝑛
We can rearrange this statement, to capture that the difference between the random variable and some
constant 𝜇 converges to a normal distribution around zero, with a variance determined by the number of
observations:1

𝜎2
(𝑋𝑛 − 𝜇) ∼ 𝑁 (0, ).
𝑛
Further rearrangement yields

𝜎
(𝑋𝑛 − 𝜇) ∼ √ 𝑁 (0, 1)
𝑛
√
𝑛(𝑋𝑛 − 𝜇)
∼ 𝑁 (0, 1),
𝜎
by first moving the finite variance and 𝑛 terms outside of the normal distribution, and then dividing through.
Given this, if 𝑔 is some smooth function (i.e. there are no discontinuous jumps in values) then the Delta
Method states that:
√
𝑛(𝑔(𝑋𝑛 ) − 𝑔(𝜇))
≈ 𝑁 (0, 1),
|𝑔′ (𝜇)|𝜎

where 𝑔′ is the first derivative of 𝑔. Rearranging again, we can see that

1 There are clear parallels here to how we expressed estimator consistency.

45
 𝑔′ (𝜇)2 𝜎2
𝑔(𝑋𝑛 ) ≈ 𝑁 (𝑔(𝜇), ).
𝑛
2
Note that the statement above is an approximation because 𝑔(𝑋𝑛 ) = 𝑔(𝜇) + 𝑔′ (𝜇)(𝜇 −̂ 𝜇 + 𝑔″ (𝜇) (𝑋𝑛2!−𝜇) + ...,
i.e. an infinite sum. The Delta Method avoids the infinite regress by ignoring higher order terms (Liu, 2012).
I return to this point below in the proof.
DM also generalizes to multidimensional functions, where instead of converging on the standard normal the
random variable must converge in distribution to a multivariate normal, and the derivatives of 𝑔 are replaced
with the gradient of g (a vector of all partial derivatives).[^fn_gradient] For the sake of simplicity I do not
prove this result here, and instead focus on the univariate case.

𝑑𝑔
⎡ 𝑑𝑥
𝑑𝑔 ⎤
1

∇𝑔 = ⎢ 2 ⎥
⎢ 𝑑𝑥
⎥
⎢ ⋮ ⎥
𝑑𝑔
⎣ 𝑑𝑥𝑛 ⎦

7.2 Proof
Before offering a full proof, we need to know a little bit about Taylor Series and Taylor’s Theorem. I briefly
outline this concept here, then show how this expansion helps to prove DM.

7.2.1 Taylor’s Series and Theorem

Suppose we have some continuous function 𝑔 that is infinitely differentiable. By that, we mean that we mean
some function that is continuous over a domain, and for which there is always some further derivative of the
function. Consider the case 𝑔(𝑥) = 𝑒2𝑥 ,

𝑔′ (𝑥) = 2𝑒2𝑥
𝑔″ (𝑥) = 4𝑒2𝑥
𝑔‴ (𝑥) = 8𝑒2𝑥
𝑔⁗ (𝑥) = 16𝑒2𝑥
...
For any integer 𝑘, the 𝑘th derivative of 𝑔(𝑥) is defined. An interesting non-infinitely differentiable function
would be 𝑔(𝑥) = |𝑥| where −∞ < 𝑥 < ∞. Here note that when 𝑥 > 0, the first order derivative is 1 (the
function is equivalent to 𝑥), and similarly at 𝑥 < 0, the first order derivative is -1 (the function is equivalent
to −𝑥). When 𝑥 = 0, however, the first derivative is undefined – the first derivative jumps discontinuously.
The Taylor Series for an infinitely differentiable function at a given point 𝑥 = 𝑝 is an expansion of that
function in terms of an infinite sum:

𝑔″ (𝑝) 𝑔‴ (𝑝)
𝑔(𝑥) = 𝑔(𝑝) + 𝑔′ (𝑝)(𝑥 − 𝑝) + (𝑥 − 𝑝)2 + (𝑥 − 𝑝)3 + ...
2! 3!

Taylor Series are useful because they allow us to approximate a function at a lower polynomial order, using
Taylor’s Theorem. This Theorem loosely states that, for a given point 𝑥 = 𝑝, we can approximate a
continuous and k-times differentiable function to the 𝑗th order using the Taylor Series up to the 𝑗th derivative.
In other words, if we have some continuous differentiable function 𝑔(𝑥), its first-order approximation (i.e. its
linear approximation) at point 𝑝 is defined as

46
 𝑔(𝑝) + 𝑔′ (𝑝)(𝑥 − 𝑝).

To make this more concrete, consider the function 𝑔(𝑥) = 𝑒𝑥 . The Taylor Series expansion of 𝑔 at point
𝑥 = 0 is

𝑔″ (0) 𝑔‴ (0)
𝑔(𝑥) = 𝑔(0) + 𝑔′ (0)(𝑥 − 0) + (𝑥 − 0)2 + (𝑥 − 0)3 + ...
2! 3!

So up to the first order, Taylors Theorem states that

𝑔(𝑥) ≈ 𝑔(0) + 𝑔′ (0)(𝑥 − 0) = 1 + 𝑥,
which is the line tangent to 𝑒𝑥 at 𝑥 = 0. If we consider up to the second order (the quadratic approximation)
our fit would be better, and even more so if we included the third, fourth, fifth orders and so on, up until
the ∞th order – at which point the Taylor Approximation is the function precisely.

7.2.2 Proof of Delta Method

Given Taylor’s Theorem, we know that so long as 𝑔 is a continuous and derivable up to the 𝑘th derivative,
where 𝑘 ≥ 2, then at the point 𝜇:

𝑔(𝑋𝑛 ) ≈ 𝑔(𝜇) + 𝑔′ (𝜇)(𝑋𝑛 − 𝜇).

Subtracting 𝑔(𝜇) we have:

(𝑔(𝑋𝑛 ) − 𝑔(𝜇)) ≈ 𝑔′ (𝜇)(𝑋𝑛 − 𝜇).

𝑑 2
→ 𝑁 (0, 𝜎𝑛 ). Therefore we can rewrite
We know by CLT and our assumptions regarding 𝑋𝑛 that (𝑋𝑛 − 𝜇) −
the above as

𝜎2
(𝑔(𝑋𝑛 ) − 𝑔(𝜇)) ≈ 𝑔′ (𝜇)𝑁 (0, ),
𝑛

Hence, by the properties of normal distributions (multiplying by a constant, adding a constant):

𝑔′ (𝜇)2 𝜎2
𝑔(𝑋𝑛 ) ≈ 𝑁 (𝑔(𝜇), ) □
𝑛

7.3 Applied example

Bowler et al. (2006) use the DM to provide confidence intervals for predicted probabilities generated from a
logistic regression. Their study involves surveying politicians’ attitudes toward electoral rule changes. They
estimate a logistic model of the support for change on various features of the politicians including whether
they won under existing electoral rules or not. To understand how winning under existing rules affects
attitudes, they then generate the predicted probabilities for losers and winners separately.
Generating predicted probabilities from a linear regression involves a non-linear transformation of an asymp-
totically normal parameter (the logistic coefficient), and therefore we must take account of this transformation
when variance of the predicted probability.
To generate the predicted probability we use the equation

47
 ̂
𝑒(𝛼+
̂ 𝛽1 𝑋1 +...+𝛽𝑛 𝑋𝑛 )
𝑝̂ = ,
̂ 𝛽1̂ 𝑋1 +...+𝛽𝑛
1 + 𝑒(𝛼+ ̂ 𝑋 )
𝑛

where 𝑝̂ is the predicted probability. Estimating the variance around the predicted probability is therefore
quite difficult – it involves multiple estimators, and non-linear transformations. But we do know that,
assuming i.i.d and correct functional form, the estimating error of the logistic equation is asymptotically
multivariate normal on the origin. And so the authors can use DM to calculate 95 percent confidence intervals.
In general, the delta method is a useful way of estimating standard and errors and confidence intervals when
using (but not limited to) logistic regression and other models involving non-linear transformations of model
parameters.

7.4 Alternative strategies

The appeal of the delta method is that it gives an analytic approximation of a function’s distribution,
using the asymptotic properties of some more (model) parameter. But there are alternative methods to
approximating these distributions (and thus standard errors) that do not rely on deriving the order conditions
of that function.
One obvious alternative is the bootstrap. For a given transformation of a random variable, calculate the
output of the function 𝐵 times using samples of the same size as the original sample, but with replacement
and take either the standard deviation or the 𝑎 and 1 − 𝑎 percentiles of the resultant parameter distribution.
This method does not require the user to calculate the derivative of a function. It is a non-parametric
alternative that simply approximates the distribution itself, rather than approximates the parameters of a
parametric distribution.
The bootstrap is computationally more intensive (requiring 𝐵 separate samples and calculations etc.) but,
on the other hand, is less technical to calculate. Moreover, the Delta Method’s approximation is limited
analytically by the number of terms considered in the Taylor Series expansion. While the first order Taylor
Theorem may be reasonable, it may be imprecise. To improve the precision one has to undertake to find the
second, third, fourth etc. order terms (which may be analytically difficult). With bootstrapping, however,
you can improve precision simply by taking more samples (increasing 𝐵) (King et al., 2000).
Given the ease with which we can acquire and deploy computational resources now, perhaps the delta method
is no longer as useful in applied research. But the proof and asymptotic implications remain statistically
interesting and worth knowing.

48
Chapter 8

Frisch-Waugh-Lovell Theorem

8.1 Theorem in plain English

The Frisch-Waugh-Lovell Theorem (FWL; after the initial proof by Frisch and Waugh (1933), and later
generalisation by Lovell (1963)) states that:

Any predictor’s regression coefficient in a multivariate model is equivalent to the regression coefficient esti-
mated from a bivariate model in which the residualised outcome is regressed on the residualised component
of the predictor; where the residuals are taken from models regressing the outcome and the predictor on all
other predictors in the multivariate regression (separately).

More formally, assume we have a multivariate regression model with 𝑘 predictors:

𝑦 ̂ = 𝛽1̂ 𝑥1 + ...𝛽𝑘̂ 𝑥𝑘 + 𝜖. (8.1)

FWL states that every 𝛽𝑗̂ in Equation 8.1 is equal to 𝛽𝑗∗̂ , and the residual 𝜖 = 𝜖∗ in:

𝜖𝑦 = 𝛽𝑗∗̂ 𝜖𝑥𝑗 + 𝜖∗ (8.2)

where:

𝜖𝑦 = 𝑦 − ∑ 𝛽𝑘𝑦̂ 𝑥𝑘
𝑘≠𝑗
𝑥 (8.3)
𝜖 𝑥𝑗
= 𝑥𝑗 − ∑ 𝛽𝑘̂ 𝑗 𝑥𝑘 .
𝑘≠𝑗

𝑥
where 𝛽𝑘𝑦̂ and 𝛽𝑘̂ 𝑗 are the regression coefficients from two separate regression models of the outcome (omitting
𝑥𝑗 ) and 𝑥𝑗 respectively.

In other words, FWL states that each predictor’s coefficient in a multivariate regression explains that variance
of 𝑦 not explained by both the other k-1 predictors’ relationship with the outcome and their relationship
with that predictor, i.e. the independent effect of 𝑥𝑗 .

49
8.2 Proof

8.2.1 Primer: Projection matrices1

We need two important types of projection matrices to understand the linear algebra proof of FWL. First,
the prediction matrix that was introduced in Chapter 4:

𝑃 = 𝑋(𝑋 ′ 𝑋)−1 𝑋 ′ . (8.4)

Recall that this matrix, when applied to an outcome vector (𝑦), produces a set of predicted values (𝑦).
̂
Reverse engineering this, note that 𝑦 ̂ = 𝑋 𝛽 ̂ = 𝑋(𝑋 ′ 𝑋)−1 𝑋 ′ 𝑦 = 𝑃 𝑦.
Since 𝑃 𝑦 produces the predicted values from a regression on 𝑋, we can define its complement, the residual
maker:

𝑀 = 𝐼 − 𝑋(𝑋 ′ 𝑋)−1 𝑋 ′ , (8.5)

since 𝑀 𝑦 = 𝑦 − 𝑋(𝑋 ′ 𝑋)−1 𝑋 ′ 𝑦 ≡ 𝑦 − 𝑃 𝑦 ≡ 𝑦 − 𝑋 𝛽 ̂ ≡ 𝜖,̂ the residuals from regressing 𝑌 on 𝑋.

Given these definitions, note that M and P are complementary:

𝑦 = 𝑦̂ + 𝜖 ̂
≡ 𝑃 𝑦 + 𝑀𝑦
𝐼𝑦 = 𝑃 𝑦 + 𝑀 𝑦 (8.6)
𝐼𝑦 = (𝑃 + 𝑀 )𝑦
𝐼 = 𝑃 + 𝑀.

With these projection matrices, we can express the FWL claim (which we need to prove) as:

𝑦 = 𝑋1 𝛽1̂ + 𝑋2 𝛽2̂ + 𝜖 ̂
(8.7)
𝑀1 𝑦 = 𝑀1 𝑋2 𝛽2̂ + 𝜖,̂

2
8.2.2 FWL Proof

Let us assume, as in Equation 8.7 that:

𝑌 = 𝑋1 𝛽1̂ + 𝑋2 𝛽2̂ + 𝜖.̂ (8.8)

First, we can multiply both sides by the residual maker of 𝑋1 :

𝑀1 𝑌 = 𝑀1 𝑋1 𝛽1̂ + 𝑀1 𝑋2 𝛽2̂ + 𝑀1 𝜖,̂ (8.9)

which first simplifies to:

1 Citation Based on lecture notes from the University of Oslo’s “Econometrics – Modelling and Systems Estimation” course

(author attribution unclear), and Davidson et al. (2004).}

2 Citation: Adapted from York University, Canada’s wiki for statistical consulting.

50
 𝑀1 𝑌 = 𝑀1 𝑋2 𝛽2̂ + 𝑀1 𝜖,̂ (8.10)

because 𝑀1 𝑋1 𝛽1̂ ≡ (𝑀1 𝑋1 )𝛽1̂ ≡ 0𝛽1̂ = 0. In plain English, by definition, all the variance in 𝑋1 is explained
by 𝑋1 and therefore a regression of 𝑋1 on itself leaves no part unexplained so 𝑀1 𝑋1 is zero.3
Second, we can simplify this equation further because, by the properties of OLS regression, 𝑋1 and 𝜖 are
orthogonal. Therefore the residual of the residuals are the residuals! Hence:

𝑀1 𝑌 = 𝑀1 𝑋2 𝛽2̂ + 𝜖 ̂ □.

8.2.3 Interesting features/extensions

A couple of interesting features come out of the linear algebra proof:

• FWL also holds for bivariate regression when you first residualise Y and X on a 𝑛 × 1 vector of 1’s
(i.e. the constant) – which is like demeaning the outcome and predictor before regressing the two.
• 𝑋1 and 𝑋2 are technically sets of mutually exclusive predictors i.e. 𝑋1 is an 𝑛 × 𝑘 matrix {𝑋1 , ..., 𝑋𝑘 },
and 𝑋2 is an 𝑛×𝑚 matrix {𝑋𝑘+1 , ..., 𝑋𝑘+𝑚 }, where 𝛽1 is a corresponding vector of regression coefficients
𝛽1 = {𝛾1 , ..., 𝛾𝑘 }, and likewise 𝛽2 = {𝛿1 , ..., 𝛿𝑚 }, such that:

𝑌 = 𝑋 1 𝛽1 + 𝑋 2 𝛽2
̂ ,
= 𝑋1 𝛾1̂ + ... + 𝑋𝑘 𝛾𝑘̂ + 𝑋𝑘+1 𝛿1̂ + ... + 𝑋𝑘+𝑚 𝛿𝑚

Hence the FWL theorem is exceptionally general, applying not only to arbitrarily long coefficient vectors,
but also enabling you to back out estimates from any partitioning of the full regression model.

8.3 Coded example

set.seed(89)

## Generate random data

df <- data.frame(y = rnorm(1000,2,1.5),
x1 = rnorm(1000,1,0.3),
x2 = rnorm(1000,1,4))

## Partial regressions

# Residual of y regressed on x1
y_res <- lm(y ~ x1, df)$residuals

# Residual of x2 regressed on x1
x_res <- lm(x2 ~ x1, df)$residuals

resids <- data.frame(y_res, x_res)

## Compare the beta values for x2

3 Algebraically, 𝑀1 𝑋1 = (𝐼 − 𝑋1 (𝑋1′ 𝑋1 )−1 𝑋1′ )𝑋1 = 𝑋1 − 𝑋1 (𝑋1′ 𝑋1 )−1 𝑋1′ 𝑋 = 𝑋1 − 𝑋1 𝐼 = 𝑋1 − 𝑋1 = 0.

51
# Multivariate regression:
summary(lm(y~x1+x2, df))

##
## Call:
## lm(formula = y ~ x1 + x2, data = df)
##
## Residuals:
## Min 1Q Median 3Q Max
## -4.451 -1.001 -0.039 1.072 5.320
##
## Coefficients:
## Estimate Std. Error t value Pr(>|t|)
## (Intercept) 2.33629 0.16427 14.222 <2e-16 ***
## x1 -0.31093 0.15933 -1.952 0.0513 .
## x2 0.02023 0.01270 1.593 0.1116
## ---
## Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1
##
## Residual standard error: 1.535 on 997 degrees of freedom
## Multiple R-squared: 0.006252, Adjusted R-squared: 0.004258
## F-statistic: 3.136 on 2 and 997 DF, p-value: 0.04388
# Partials regression
summary(lm(y_res ~ x_res, resids))

##
## Call:
## lm(formula = y_res ~ x_res, data = resids)
##
## Residuals:
## Min 1Q Median 3Q Max
## -4.451 -1.001 -0.039 1.072 5.320
##
## Coefficients:
## Estimate Std. Error t value Pr(>|t|)
## (Intercept) -8.921e-17 4.850e-02 0.000 1.000
## x_res 2.023e-02 1.270e-02 1.593 0.111
##
## Residual standard error: 1.534 on 998 degrees of freedom
## Multiple R-squared: 0.002538, Adjusted R-squared: 0.001538
## F-statistic: 2.539 on 1 and 998 DF, p-value: 0.1114
Note: This isn’t an exact demonstration because there is a degrees of freedom of error. The (correct)
multivariate regression degrees of freedom is calculated as 𝑁 − 3 since there are three variables. In the
partial regression the degrees of freedom is 𝑁 − 2. This latter calculation does not take into account the
additional loss of freedom as a result of partialling out 𝑋1 .

8.4 Application: Sensitivity analysis

Cinelli and Hazlett (2020) develop a series of tools for researchers to conduct sensitivity analyses on regression
models, using an extension of the omitted variable bias framework. To do so, they use FWL to motivate
this bias. Suppose that the full regression model is specified as:

52
 𝑌 = 𝜏 ̂𝐷 + 𝑋 𝛽 ̂ + 𝛾𝑍
̂ + 𝜖full
̂ , (8.11)

where 𝜏 ̂, 𝛽,̂ 𝛾̂ are estimated regression coefficients, D is the treatment variable, X are observed covariates,
and Z are unobserved covariates. Since, Z is unobserved, researchers measure:

𝑌 = 𝜏Obs.
̂ ̂
𝐷 + 𝑋 𝛽Obs. + 𝜖Obs (8.12)

By FWL, we know that 𝜏Obs. ̂ is equivalent to the coefficient of regressing the residualised outcome (with
respect to X), on the residualised outcome of D (again with respect to X). Call these two residuals 𝑌𝑟 and
𝐷𝑟 .
And recall that the regression model for the final-stage of the partial regressions is bivariate (𝑌𝑟 ∼ 𝐷𝑟 ).
Conveniently, a bivariate regression coefficient can be expressed in terms of the covariance between the
left-hand and right-hand side variables:4

𝑐𝑜𝑣(𝐷𝑟 , 𝑌𝑟 )
𝜏Obs.
̂ = . (8.13)
𝑣𝑎𝑟(𝐷𝑟 )

Note that given the full regression model in Equation 8.11, the partial outcome 𝑌𝑟 is actually composed of
the elements 𝜏 ̂𝐷𝑟 + 𝛾𝑍
̂ 𝑟 , and so:

𝑐𝑜𝑣(𝐷𝑟 , 𝜏 ̂𝐷𝑟 + 𝛾𝑍
̂ 𝑟)
𝜏Obs.
̂ = (8.14)
𝑣𝑎𝑟(𝐷𝑟 )

Next, we can expand the covariance using the expectation rule that 𝑐𝑜𝑣(𝐴, 𝐵 + 𝐶) = 𝑐𝑜𝑣(𝐴, 𝐵) + 𝑐𝑜𝑣(𝐴, 𝐶)
and since 𝜏 ̂, 𝛾̂ are scalar, we can move them outside the covariance functions:

𝜏 ̂𝑐𝑜𝑣(𝐷𝑟 , 𝐷𝑟 ) + 𝛾𝑐𝑜𝑣(𝐷
̂ 𝑟 , 𝑍𝑟 )
𝜏Obs.
̂ = (8.15)
𝑣𝑎𝑟(𝐷𝑟 )

Since 𝑐𝑜𝑣(𝐴, 𝐴) = 𝑣𝑎𝑟(𝐴) and therefore:

𝜏 ̂𝑣𝑎𝑟(𝐷𝑟 ) + 𝛾𝑐𝑜𝑣(𝐷
̂ 𝑟 , 𝑍𝑟 ) 𝑐𝑜𝑣(𝐷𝑟 , 𝑍𝑟 )
𝜏Obs.
̂ = ≡ 𝜏 ̂ + 𝛾̂ ≡ 𝜏 ̂ + 𝛾̂ 𝛿 ̂ (8.16)
𝑣𝑎𝑟(𝐷𝑟 ) 𝑣𝑎𝑟(𝐷𝑟 )

Frisch-Waugh is so useful because it simplifies a multivariate equation into a bivariate one. While compu-
tationally this makes zero difference (unlike in the days of hand computation), here it allows us to use a
convenient expression of the bivariate coefficient to show and quantify the bias when you run a regression
in the presence of an unobserved confounder. Moreover, note that in Equation 8.14, we implicitly use FWL
again since we know that the non-stochastic aspect of Y not explained by X are the residualised components
of the full Equation 8.11.

8.4.1 Regressing the partialled-out X on the full Y

In Mostly Harmless Econometrics (MHE; Angrist and Pischke (2009)), the authors note that you also get
an identical coefficient to the full regression if you regress the residualised predictor on the non-residualised
𝑌 . We can use the OVB framework above to explain this case.
Let’s take the full regression model as:
4 If ̂ + 𝜖, then by least squares 𝛽 ̂ = 𝑐𝑜𝑣(𝑥,𝑦) ̂ ̄
𝑦 = 𝛼̂ + 𝛽𝑥 𝑣𝑎𝑟(𝑥) and 𝛼̂ = 𝑦̄ − 𝛽𝑥.

53
 𝑌 = 𝛽1̂ 𝑋1 + 𝛽2̂ 𝑋2 + 𝜖.̂ (8.17)

MHE states that:

𝑌 = 𝛽1̂ 𝑀2 𝑋1 + 𝜖.̂ (8.18)

Note that this is just FWL, except we have not also residualised 𝑌 . Our aim is to check whether there is
any bias in the estimated coefficient from this second equation. As before, since this is a bivariate regression
we can express the coefficient as:

𝑐𝑜𝑣(𝑀2 𝑋1 , 𝑌 )
𝛽1̂ =
𝑣𝑎𝑟(𝑀2 𝑋1 )
𝑐𝑜𝑣(𝑀2 𝑋1 , 𝛽1̂ 𝑋1 + 𝛽2̂ 𝑋2 )
=
𝑣𝑎𝑟(𝑀2 𝑋1 )
𝑐𝑜𝑣(𝑀2 𝑋1 , 𝑋1 ) 𝑐𝑜𝑣(𝑀2 𝑋1 , 𝑋2 ) (8.19)
= 𝛽1̂ + 𝛽2̂
𝑣𝑎𝑟(𝑀2 𝑋1 ) 𝑣𝑎𝑟(𝑀2 𝑋1 )
= 𝛽̂ + 𝛽̂ × 0
1 2

= 𝛽̂1

This follows from two features. First, 𝑐𝑜𝑣(𝑀2 𝑋1 , 𝑋1 ) = 𝑣𝑎𝑟(𝑀2 𝑋1 ). Second, it is clear that
𝑐𝑜𝑣(𝑀2 𝑋1 , 𝑋2 ) = 0 because 𝑀2 𝑋1 is 𝑋1 stripped of any variance associated with 𝑋2 and so, by
definition, they do not covary. Therefore, we can recover the unbiased regression coefficient using an
adapted version of FWL where we do not residualise Y – as stated in MHE.

54
Chapter 9

Positive Definite Matrices

9.1 Terminology
A 𝑛 × 𝑛 symmetric matrix 𝑀 is positive definite (PD) if and only if 𝑥′ 𝑀 𝑥 > 0, for all non-zero 𝑥 ∈ ℝ𝑛 . For
example, take the 3 × 3 identity matrix, and a column vector of non-zero real numbers [𝑎, 𝑏, 𝑐]:

1 00 𝑎
[𝑎 𝑏 𝑐] ⎡
⎢0 0⎤
1 ⎡ ⎤
⎥ ⎢𝑏 ⎥
⎣0 1⎦ ⎣ 𝑐 ⎦
0
𝑎
= [𝑎 𝑏 𝑐] ⎡ ⎤
⎢𝑏 ⎥
⎣𝑐 ⎦
= 𝑎 + 𝑏 + 𝑐2 .
2 2

Since by definition 𝑎2 , 𝑏2 , and 𝑐2 are all greater than zero (even if 𝑎, 𝑏, or 𝑐 are negative), their sum is also
positive.
A matrix is positive semi-definite (PSD) if and only if 𝑥′ 𝑀 𝑥 ≥ 0 for all non-zero 𝑥 ∈ ℝ𝑛 . Note that PSD
differs from PD in that the transformation of the matrix is no longer strictly positive.
One known feature of matrices (that will be useful later in this chapter) is that if a matrix is symmetric and
idempotent then it will be positive semi-definite. Take some non-zero vector 𝑥, and a symmetric, idempotent
matrix 𝐴. By idempotency we know that 𝑥′ 𝐴𝑥 = 𝑥′ 𝐴𝐴𝑥. By symmetry we know that 𝐴′ = 𝐴, and therefore:

𝑥′ 𝐴𝑥 = 𝑥′ 𝐴𝐴𝑥
= 𝑥′ 𝐴′ 𝐴𝑥
= (𝐴𝑥)′ 𝐴𝑥 ≥ 0,

and hence PSD.1

9.1.1 Positivity

Both PD and PSD are concerned with positivity. For scalar values like -2, 5, 89, positivity simply refers to
their sign – and we can tell immediately whether the numbers are positive or not. Some functions are also
(strictly) positive. Think about 𝑓(𝑥) = 𝑥2 + 1. For all 𝑥 ∈ ℝ, 𝑓(𝑥) ≥ 1 > 0. PD and PSD extend this notion
1 This short proof is taken from this discussion.

55
of a positivity to matrices, which is useful when we consider multidimensional optimisation problems or the
combination of matrices.
While for abstract matrices like the identity matrix it is easy to verify PD and PSD properties, for more
complicated matrices we often require other more complicated methods. For example, we know that a
symmetric matrix is PSD if and only if all its eigenvalues are non-negative. The eigenvalue 𝜆 is a scalar
such that, for a matrix 𝐴 and non-zero 𝑛 × 1 vector 𝑣, 𝐴 ⋅ 𝑣 = 𝜆 ⋅ 𝑣. While I do not explore this further in
this chapter, there are methods available for recovering these values from the preceding equation. Further
discussion of the full properties of PD and PSD matrices can be found here as well as in print (e.g. Horn
and Johnson, 2013, Chapter 7).

9.2 𝐴 − 𝐵 is PSD iff 𝐵−1 − 𝐴−1 is PSD

Wooldridge’s list of 10 theorems does not actually include a general claim about the importance P(S)D
matrices. Instead, he lists a very specific feature of two PD matrices. In plain English, this theorem states
that, assuming 𝐴 and 𝐵 are both positive definite, 𝐴 − 𝐵 is positive semi-definite if and only if the inverse
of 𝐵 minus the inverse of 𝐴 is positive semi-definite.
Before we prove this theorem, it’s worth noting a few points that are immediately intuitive from its statement.
Note that the theorem moves from PD matrices to PSD matrices. This is because we are subtracting one
matrix from another. While we know A and B are both PD, if they are both equal then 𝑥′ (𝐴 − 𝐵)𝑥 will
equal zero. For example, if 𝐴 = 𝐵 = 𝐼2 = ( 10 01 ), then 𝐴 − 𝐵 = ( 00 00 ). Hence, 𝑥′ (𝐴 − 𝐵)𝑥 = 0 and therefore
𝐴 − 𝐵 is PSD, but not PD.
Also note that this theorem only applies to a certain class of matrices, namely those we know to be PD.
This hints at the sort of applied relevance this theorem may have. For instance, we know that variance is a
strictly positive quantity.
The actual applied relevance of this theorem is not particularly obvious, at least from the claim alone. In
his post, Wooldridge notes that he repeatedly uses this fact ‘to show the asymptotic efficiency of various
estimators.’ In his Introductory Economics textbook (2013), for instance, Wooldridge makes use of the
properties of PSD matrices in proving that the Gauss-Markov (GM) assumptions ensure that OLS is the
best, linear, unbiased estimator (BLUE). And, more generally, PD and PSD matrices are very helpful in
optimisation problems (of relevance to machine learning too). Neither appear to be direct applications of
this specific, bidirectional theorem. In the remainder of this chapter, therefore, I prove the theorem itself for
completeness. I then broaden the discussion to explore how PSD properties are used in Wooldridge’s BLUE
proof as well as discuss the more general role of PD matrices in optimisation problems.

9.2.1 Proof

The proof of Wooldridge’s actual claim is straightforward. In fact, given the symmetry of the proof, we only
need to prove one direction (i.e. if 𝐴 − 𝐵 is PSD, then 𝐴−1 − 𝐵−1 is PSD.)
Let’s assume, therefore, that 𝐴 − 𝐵 is PSD. Hence:

𝑥′ (𝐴 − 𝐵)𝑥 ≥ 0
𝑥′ 𝐴𝑥 − 𝑥𝐵𝑥 ≥ 0
𝑥′ 𝐴𝑥 ≥ 𝑥′ 𝐵𝑥
𝐴𝑥 ≥ 𝐵𝑥
𝐴 ≥ 𝐵.

Next, we can invert our two matrices while maintaining the inequality:

56
 𝐴−1 𝐴𝐵−1 ≥ 𝐴−1 𝐵𝐵−1
𝐼𝐵−1 ≥ 𝐴−1 𝐼
𝐵−1 ≥ 𝐴−1 .

Finally, we can just remultiply both sides of the inequality by our arbitrary non-zero vector:

𝑥′ 𝐵−1 ≥ 𝑥′ 𝐴−1
𝑥′ 𝐵−1 𝑥 ≥ 𝑥′ 𝐴−1 𝑥
𝑥′ 𝐵−1 𝑥 − 𝑥′ 𝐴−1 𝑥 ≥ 0
𝑥′ (𝐵−1 − 𝐴−1 )𝑥 ≥ 0.

Proving the opposite direction (if 𝐵−1 − 𝐴−1 is PSD then 𝐴 − 𝐵 is PSD) simply involves replacing A with
𝐵−1 an 𝐵 with 𝐴−1 and vice versa throughout the proof, since (𝐴−1 )−1 = 𝐴. □

9.3 Applications

9.3.1 OLS as the best linear unbiased estimator (BLUE)

First, let’s introduce the four Gauss-Markov assumptions. I only state these briefly, in the interest of space,
spending a little more time explaining the rank of a matrix. Collectively, these assumptions guarantee that
the linear regression estimates 𝛽 ̂ are BLUE (the best linear unbiased estimator of 𝛽).
1. The true model is linear such that 𝑦 = 𝑋𝛽 + 𝑢, where 𝑦 is a 𝑛 × 1 vector, 𝑋 is a 𝑛 × (𝑘 + 1) matrix,
and 𝑢 is an unobserved 𝑛 × 1 vector.
2. The rank of 𝑋 is (𝑘 + 1) (full-rank), i.e. that there are no linear dependencies among the variables in
𝑋. To understand what the rank of matrix denotes, consider the following 3 × 3 matrix:

1 0 0
𝑀1 = ⎡
⎢0 1 0⎤⎥
⎣2 0 0⎦

Note that the third row of 𝑀1 is just two times the first column. They are therefore entirely linearly
dependent, and so not separable. The number of independent rows (the rank of the matrix) is therefore 2.
One way to think about this geometrically, as in Chapter 3, is to plot each row as a vector. The third vector
would completely overlap the first, and so in terms of direction we would not be able to discern between
them. In terms of the span of these two columns, moreover, there is no point that one can get to using a
combination of both that one could not get to by scaling either one of them.
A slightly more complicated rank-deficient (i.e. not full rank) matrix would be:

1 0 0
𝑀2 = ⎡
⎢0 1 0⎤⎥
⎣2 1 0⎦

Here note that the third row is not scalar multiple of either other column. But, it is a linear combination
of the other two. If rows 1, 2, and 3 are represented by 𝑎, 𝑏, and 𝑐 respectively, then 𝑐 = 2𝑎 + 𝑏. Again,
geometrically, there is no point that the third row vector can take us to which cannot be achieved using only
the first two rows.
An example of a matrix with full-rank, i.e. no linear dependencies, would be:

57
 1 0 0
𝑀2 = ⎡
⎢0 1 0⎤⎥
⎣2 0 1⎦

It is easy to verify that 𝑀1 and 𝑀2 are rank-deficient, whereas 𝑀3 is of full-rank in R:

M1 <- matrix(c(1,0,2,0,1,0,0,0,0), ncol = 3)
M1_rank <- qr(M1)$rank

M2 <- matrix(c(1,0,2,0,1,1,0,0,0), ncol = 3)

M2_rank <- qr(M2)$rank

M3 <- matrix(c(1,0,2,0,1,0,0,0,1), ncol = 3)

M3_rank <-qr(M3)$rank

print(paste("M1 rank:", M1_rank))

## [1] "M1 rank: 2"

print(paste("M2 rank:", M2_rank))

## [1] "M2 rank: 2"

print(paste("M3 rank:", M3_rank))

## [1] "M3 rank: 3"

3. 𝔼[𝑢|𝑋] = 0 i.e. that the model has zero conditional mean or, in other words, our average error is zero.
4. Var(𝑢𝑖 |𝑋) = 𝜎2 , Cov(𝑢𝑖 , 𝑢𝑗 |𝑋) = 0 for all 𝑖 ≠ 𝑗, or equivalently that 𝑉 𝑎𝑟(𝑢|𝑋) = 𝜎2 𝐼𝑛 . This matrix
has diagonal elements all equal to 𝜎2 and all off-diagonal elements equal to zero.
BLUE states that the regression coefficient vector 𝛽 ̂ is the best, or lowest variance, estimator of the true 𝛽.
Wooldridge (2013) has a nice onproof of this claim (p.812). Here I unpack hisi proof in slightly more detail,
noting specifically how PD matrices are used.
To begin our proof of BLUE, let us denote any other linear estimator as 𝛽 ̃ = 𝐴′ 𝑦, where 𝐴 is some 𝑛 × (𝑘 + 1)
matrix consisting of functions of 𝑋.
We know by definition that 𝑦 = 𝑋𝛽 + 𝑢 and therefore that:

𝛽 ̃ = 𝐴′ (𝑋𝛽 + 𝑢) = 𝐴′ 𝑋𝛽 + 𝐴′ 𝑢.

The conditional expectation of 𝛽 ̃ can be expressed as:

̃
𝔼(𝛽|𝑋) = 𝐴′ 𝑋𝛽 + 𝔼(𝐴′ 𝑢|𝑋),

and since 𝐴 is a function of 𝑋, we can move it outside the expectation:

̃
𝔼(𝛽|𝑋) = 𝐴′ 𝑋𝛽 + 𝐴′ 𝔼(𝑢|𝑋).

By the GM assumption no. 3, we know that 𝔼(𝑢|𝑋) = 0, therefore:

̃
𝔼(𝛽|𝑋) = 𝐴′ 𝑋𝛽.

58
Since we are only comparing 𝛽 ̂ against other unbiased estimators, we know the conditional mean of any other
estimator must equal the true parameter, and therefore that

𝐴′ 𝑋𝛽 = 𝛽.

The only way that this is true is if 𝐴′ 𝑋 = 𝐼. Hence, we can rewrite our estimator as

𝛽 ̃ = 𝛽 + 𝐴′ 𝑢.

The variance of our estimator 𝛽 ̃ then becomes

̃
𝑉 𝑎𝑟(𝛽|𝑋) = (𝛽 − [𝛽 + 𝐴′ 𝑢])(𝛽 − [𝛽 + 𝐴′ 𝑢])′
= (𝐴′ 𝑢)(𝐴′ 𝑢)′
= 𝐴′ 𝑢𝑢′ 𝐴
= 𝐴′ [Var(𝑢|𝑋)]𝐴
= 𝜎2 𝐴′ 𝐴,

since by GM assumption no. 4 the variance of the errors is a constant scalar 𝜎2 .

Hence:

̃
Var(𝛽|𝑋) ̂
− Var(𝛽|𝑋) = 𝜎2 𝐴′ 𝐴 − 𝜎2 (𝑋 ′ 𝑋)−1
= 𝜎2 [𝐴′ 𝐴 − (𝑋 ′ 𝑋)−1 ].
We know that 𝐴′ 𝑋 = 𝐼, and so we can manipulate this expression further:

̃
Var(𝛽|𝑋) ̂
− Var(𝛽|𝑋) = 𝜎2 [𝐴′ 𝐴 − (𝑋 ′ 𝑋)−1 ]
= 𝜎2 [𝐴′ 𝐴 − 𝐴′ 𝑋(𝑋 ′ 𝑋)−1 𝑋 ′ 𝐴]
= 𝜎2 𝐴′ [𝐴 − 𝑋(𝑋 ′ 𝑋)−1 𝑋 ′ 𝐴]
= 𝜎2 𝐴′ [𝐼 − 𝑋(𝑋 ′ 𝑋)−1 𝑋 ′ ]𝐴
= 𝜎2 𝐴′ 𝑀 𝐴.

Note that we encountered 𝑀 in the previous chapter. It is the residual maker, and has the known property of
being both symmetric and idempotent. Recall from the first section that we know any symmetric, idempotent
matrix is positive semi-definite, and so we know that

̃
Var(𝛽|𝑋) ̂
− Var(𝛽|𝑋) ≥ 0,

and thus that the regression estimator 𝛽 ̂ is more efficient (hence better) than any other unbiased, linear
estimator of 𝛽. □
Note that 𝛽 ̂ and 𝛽 ̃ are both (𝑘 + 1) × 1 vectors. As Wooldridge notes at the end of the proof, for any
(𝑘 + 1) × 1 vector 𝑐, we can calculate the scalar 𝑐′ 𝛽. Think of 𝑐 as the row vector of the ith observation from
𝑋. Then 𝑐′ 𝛽 = 𝑐𝑜′ 𝛽0 + 𝑐1 𝛽1 + ... + 𝑐𝑘 𝛽𝑘 = 𝑦𝑖 . Both 𝑐′ 𝛽 ̂ and 𝑐′ 𝛽 ̃ are both unbiased estimators of 𝑐′ 𝛽. Note
as an extension of the proof above that

̃
Var(𝑐′ 𝛽|𝑋) ̂
− Var(𝑐′ 𝛽|𝑋) ̃
= 𝑐′ [Var(𝛽|𝑋) ̂
− Var(𝛽|𝑋)]𝑐.

̃
We know that Var(𝛽|𝑋) ̂
− Var(𝛽|𝑋) is PSD, and hence by definition that:

59
 ̃
𝑐′ [Var(𝛽|𝑋) ̂
− Var(𝛽|𝑋)]𝑐 ≥ 0,

and hence, for any observation in X (call it 𝑥𝑖 ), and more broadly any linear combination of 𝛽,̂ if the GM
assumptions hold the estimate 𝑦𝑖̂ = 𝑥𝑖 𝛽 ̂ has the smallest variance of any possible linear, unbiased estimator.

9.3.2 Optimisation problems

Optimisation problems, in essence, are about tweaking some parameter(s) until an objective function is as
good as it can be. The objective function summarises some aspect of the model given a potential solution.
For example, in OLS, our objection function is defined as ∑𝑖 (𝑦𝑖 − 𝑦𝑖̂ )2 – the sum of squared errors. Typically,
“as good as it can be” stands for “is minimised” or “is maximised.” For example with OLS we seek to minimise
the sum of the squared error terms. In a slight extension of this idea, many machine learning models aim to
minimise the prediction error on a “hold-out” sample of observations i.e. observations not used to select the
model parameters. The objective loss function may be the sum of squares, or it could be the mean squared
error, or some more convoluted criteria.
By “tweaking” we mean that the parameter values of the model are adjusted in the hope of generating
an even smaller (bigger) value from our objective function. For example, in least absolute shrinkage and
selection (LASSO) regression, the goal is to minimise both the squared prediction error (as in OLS) as well
as the total size of the coefficient vector. More formally, we can write this objective function as:

(𝑦 − 𝑋𝛽)2 + 𝜆||𝛽||1 ,

where 𝜆 is some scalar, and ||𝛽||1 is the sum of the absolute size of the coefficients i.e. ∑𝑗 |𝛽𝑗 |.
There are two ways to potentially alter the value of the LASSO loss function: we can change the values
within the vector 𝛽 or adjust the value of 𝜆. In fact, iterating through values of 𝜆, we can solve the squared
error part of the loss function, and then choose from our many different values of 𝜆 which results in the
smallest (read: minimised) objective function.
With infinitely many values of 𝜆, we can perfectly identify the optimal model. But we are often constrained
into considering only a subset of possible cases. If we are too coarse in terms of which 𝜆 values to consider,
we may miss out on substantial optimisation.
This problem is not just present in LASSO regression. Any non-parametric model (particularly those common
in machine learning) is going to face similar optimisation problems. Fortunately, there are clever ways to
reduce the computational intensity of these optimisation problems. Rather than iterating through a range
of values (an “exhaustive grid-search”) we can instead use our current loss value to adjust our next choice of
value for 𝜆 (or whatever other parameter we are optimisimng over). This sequential method helps us narrow
in on the optimal parameter values without having to necessarily consider may parameter combinations far
from the minima.
Of course, the natural question is how do we know how to adjust the scalar 𝜆, given our existing value?
Should it be increased or decreased? One very useful algorithm is gradient descent (GD), which I will focus
on in the remainder of this section. Briefly, the basics of GD are:
1. Take a (random) starting solution to your model
2. Calculate the gradient (i.e. the k-length vector of derivatives) of the loss at that point
3. If the gradient is positive (negative), decrease (increase) your parameter by the gradient value.
4. Repeat 1-3 until you converge on a stable solution.
Consider a quadratic curve in two-dimensions, as in Figure 9.1. If the gradient at a given point is positive,
then we know we are on the righthand slope. To move closer to the minimum point of the curve we want to
go left, so we move in the negative direction. If the gradient is negative, we are on the lefthand slope and
want to move in the positive direction. After every shift I can recalculate the gradient and keep adjusting.

60
Crucially, these movements are dictated by the absolute size of the gradient. Hence, as I approach the
minimum point of the curve, the gradient and therefore the movements will be smaller. In 9.1, we see that
each iteration involves not only a move towards the global minima, but also that the movements get smaller
with each iteration.

Figure 9.1: Gradient descent procedure in two dimensions.

PD matrices are like the parabola above. Geometrically, they are bowl-shaped and are guaranteed to have
a global minimum.2 Consider rolling a ball on the inside surface of this bowl. It would run up and down
the edges (losing height each time) before eventually resting on the bottom of the bowl, i.e. converging on
the global minimum. Our algorithm is therefore bound to find the global minimum, and this is obviously a
very useful property from an optimisation perspective.
If a matrix is PSD, on the other hand, we are not guaranteed to converge on a global minima. PSD matrices
have “saddle points” where the slope is zero in all directions, but are neither (local) minima or maxima in
all dimensions. Geometrically, for example, PSD matrices can look like hyperbolic parabaloids (shaped like
a Pringles crisp). While there is a point on the surface that is flat in all dimensions, it may be a minima in
one dimension, but a maxima in another.
PSD matrices prove more difficult to optimise because we are not guaranteed to converge on that point. At
a point just away from the saddle point, we may actually want to move in opposite direction to the gradient
dependent on the axis. In other words, the valence of the individual elements of the gradient vector point in
different directions. Again, imagine dropping a ball onto the surface of a hyperbolic parabaloid. The ball is
likely to pass the saddle point then run off one of the sides: gravity is pulling it down in to a minima in one
dimension, but away from a maxima in another. PSD matrices therefore prove trickier to optimise, and can
even mean we do not converge on a miniimum loss value. Therefore our stable of basic algorithms like GD
like gradient descent are less likely to be effective optimisers.
2 See these UPenn lecture notes for more details.

61
9.3.3 Recap

In this final section, we have covered two applications of positive (semi-) definiteness: the proof of OLS as
BLUE, and the ease of optimisation when a matrix is PD. There is clearly far more that can be discussed
with respect to P(S)D matrices, and this chapter links or cites various resources that can be used to go
further.

62
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