1 The Bootstrap’s Finite Sample Distribution An Analytical Approach Lawrence C. Marsh Department of Economics and Econometrics University of Notre Dame.

1

The Bootstrap’s Finite Sample DistributionAn Analytical Approach

Lawrence C. Marsh

Department of Economics and EconometricsUniversity of Notre Dame

Midwest Econometrics Group (MEG)

October 15 – 16, 2004

Northwestern University

2

This is the first of three papers:

(1.) Bootstrap’s Finite Sample Distribution ( today !!! )

(2.) Bootstrapped Asymptotically Pivotal Statistics

(3.) Bootstrap Hypothesis Testing and Confidence Intervals

3

traditional approach in econometrics

Analyticalsolution

Bootstrap’sFinite Sample Distribution

Empiricalprocess

approach used in this paper

Analyticalproblem

Analogy principle (Manski)GMM (Hansen)

Empiricalprocess

4

Bootstrap sample of size m:

Start with a sample of size n: {Xi : i = 1,…,n}

{Xj*: j = 1,…,m}

m < n or m = n or m > n

Define Mi as the frequency of drawing each Xi .

bootstrap procedure

5

n

iii

m

jj XMX

11

*

1

1

11

*

n

iiiM

m

jjM XM

mEX

mE

1

1

11

*

n

iiiM

m

jjM XM

mVarX

mVar ...

6

for i k

n

mME iM

22 1

n

mnmmME iM

2

2

n

mmMME kiM

)!!...(

!

1

1

... 1

2

1

*

2

1

*

1

mMM n

mm

jj

m

jjM

nMM

mnXf

mXf

mE

mMM n

mn

iii

nMM

mnXfM

m... 1

2

11)!!...(

!

1

mMM n

mn

i

nn

kikikiii

nMM

mnXfXfMM

mXfM

m... 11

2

2

222

1

2

)!!...(

!

21

7

= 1

1

*

m

jjM Xf

mVar

2

21

2

2

2

2

1

nn

kiki

n

ii XfXf

nmXf

nm

n

Applied Econometrician:

The bootstrap treats the original sample as if it were the population and induces multinomial distributed randomness.

8

=

Econometric theorist: what does this buy you?

Find out under joint distribution of bootstrap-induced randomness and randomness implied by the original sample data:

1

1

*,

m

jjXM Xf

mVar

2

12

12

1

1iX

n

i

n

iiX XfE

nm

nXfVar

n

.

2 ,

2

2

2

2

2

22

nn

kikiX

nn

kikiX XfXfE

nmXfXfCov

n

9

1

1

2*,

m

jjXM XX

mVar

n

iiX

n

iiX XXE

nm

nXXVar

n 1

4

21

2

2

1

1

2

22

2

222

2

22

2 ,

2

nn

kikiX

nn

kikiX XXXXE

nmXXXXCov

n

=

Econometric theorist:


222

21

4

21

2*

2

2

1

1nn

kiki

n

ii

m

jjM XXXX

nmXX

nm

nXX

mVar

2** XXXf jj

For example,

10The Wild Bootstrap

5.015.0 | iii WMW

i

iii W

MMWP

Multiply each boostrapped value by plus one or minus one each with a probability of one-half (Rademacher Distribution).

Use binomial distribution to impose Rademacher distribution:

2

1|

2

1

*|

11 n

iiiiiMWM

m

jjMWM XfWMW

mEEXf

mEE

Wi = number of positive ones out of Mi which, in turn, is the number of Xi’s drawn in m multinomial draws.

11

m

jjMW Xf

mVar

1

*,

1

n

iiXf

nm 1

21

The Wild Bootstrap

=

Econometric Theorist:


n

iiX

m

jjXMW XfVar

nmXf

mVar

11

*,,

11

under zero mean assumption

12

1

1

11

*

n

iii

m

jj XfM

mqXf

mq

.

.

.

1

1

11

*

n

iiiM

m

jjM XfM

mqEXf

mqE

1

1

11

*

n

iiiM

m

jjM XfM

mqVarXf

mqVar

13

n

iiX

nX

1

1

m

jjX

mX

1

** 1 mjX j ,...,1:* niX i ,...,1:

Xgn

go

XE

2*2

** '2

1 nOXXXXXEB GMn

almost surely, where is matrix of second partial derivatives of g. XG2

where X is a p x 1 vector.

nonlinear function of .

Horowitz (2001) approximates the bias of

for a smooth nonlinear function g as an estimator of go

14

*2

' XXXE GM

n

iiiM XM

mXXE G

12

1'

m

jjM X

mXXE G

1

*2

1'

15

2*2

** '2

1 nOXXXXXEB GMn

Horowitz (2001) uses bootstrap simulations to approximate the first term on the right hand side.

Exact finite sample solution:*nB

XXXXXXnm

mXXX

nm

mn GGG k

nn

kiii

n

ii 22

2

221

2'

2

'12'1

2

1

2nO

=

+

16

Definition: Any bootstrap statistic, , that is a function of the elements of the set {f(Xj

*): j = 1,…,m} and satisfies the separability condition

*n

n

iiin XfhMgXf mj

j

1

** : ,...,1

where g(Mi ) and h( f(Xi )) are independent functions

and where the expected value EM [g(Mi)] exists,

is a “directly analyzable” bootstrap statistic.

Separability Condition

17X is an n x 1 vector of original sample values.

X * is an m x 1 vector of bootstrapped sample values.

X * = HX where the rows of H are all zeros except

for a one in the position corresponding to the element of X that was randomly drawn.

EH[H] = (1/n) 1m1n’ where 1m and 1n are column vectors of ones.

m* = g(X *) = g(HX ) Taylor series expansion

m* =

g(Xo*) + [G1(Xo

*)]’(X *Xo*) + (1/2) (X *Xo

*)’[G2(Xo*)](X *Xo

*) + R *

Setup for empirical process: Xo* = Ho X

18

m* = g(X *) = g(HX )

Taylor series expansion

m* =

g((1/n)1m1n’X )

+ [G1((1/n)1m1n’X )]’(H(1/n)1m1n’) X

+ (1/2)X ‘(H(1/n)1m1n’)’[G2((1/n)1m1n’X )](H(1/n)1m1n’) X

+ R *

Taylor series:

Now ready to determine exact finite moments, et cetera.

X * = HX where the rows of H are all zeros

except for a one in the position corresponding

to the element of X that was randomly drawn.

Setup for analytical solution:

Xo* = Ho X Ho = EH[H] = (1/n) 1m1n’

19 YXXX '' ˆ 1

e ̂XY e = ( In – X (X’X)-1X’)

{ , , . . ., } e 1e 2e ne

** ˆ AeXY

*'' *ˆ 1 YXXX

{ , , . . ., } *e *1e *

2e *ne

EH[H] = (1/n) 1n1n’

e* = H e

A = ( In – (1/n)1n1n’ )

}No restrictions on covariance

matrix for errors.

20


.

*| ̂HCov

11

2''11''11''1 XXXAeeAXXX

n nnnn

1

2

1 '''1'111

'1''

2

XXAXeevecI

neeI

nAXXX

nnnnn

=

A = Inor where

A1n1n’ = 0 1n1n’A = 0 andA = ( In – (1/n)1n1n’ ) so

21

Econometric theorist:

ˆˆ *, CovCov H

1

2

1 ''111'11

1''2

XXXvec

ntr

nnIXXX

nnnn

''''' 11 XXXXIEXXXXI nn

+

where No restrictions on 'E

22

This is the first of three papers:

(1.) Bootstrap’s Finite Sample Distribution ( today !!! )

(2.) Bootstrapped Asymptotically Pivotal Statistics

(3.) Bootstrap Hypothesis Testing and Confidence Intervals

Thank you !

basically done.

almost done.

1 The Bootstrap’s Finite Sample Distribution An Analytical Approach Lawrence C. Marsh Department of Economics and Econometrics University of Notre Dame.

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