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Frisch–Waugh–Lovell theorem

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

The Frisch–Waugh–Lovell theorem states that if the regression we are concerned with is expressed in terms of two separate sets of predictor variables:

where and are matrices, and are vectors (and is the error term), then the estimate of will be the same as the estimate of it from a modified regression of the form:

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

and this particular orthogonal projection matrix is known as the residual maker matrix or annihilator matrix.[4][5]

The vector is the vector of residuals from regression of on the columns of .

The most relevant consequence of the theorem is that the parameters in do not apply to but to , that is: the part of uncorrelated with . This is the basis for understanding the contribution of each single variable to a multivariate regression (see, for instance, Ch. 13 in [6]).

The theorem also implies that the secondary regression used for obtaining is unnecessary when the predictor variables are uncorrelated: using projection matrices to make the explanatory variables orthogonal to each other will lead to the same results as running the regression with all non-orthogonal explanators included.

Moreover, the standard errors from the partial regression equal those from the full regression.[7]

History

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The origin of the theorem is uncertain, but it was well-established in the realm of linear regression before the Frisch and Waugh paper. George Udny Yule's comprehensive analysis of partial regressions, published in 1907, included the theorem in section 9 on page 184.[8] Yule emphasized the theorem's importance for understanding multiple and partial regression and correlation coefficients, as mentioned in section 10 of the same paper.[8]

Yule 1907 [8] also introduced the partial regression notation which is still in use today.

The theorem, later associated with Frisch, Waugh, and Lovell, and Yule's partial regression notation, were included in chapter 10 of Yule's successful statistics textbook, first published in 1911. The book reached its tenth edition by 1932.[9]

In a 1931 paper co-authored with Mudgett, Frisch explicitly quoted Yule's results.[10] Yule's formulas for partial regressions were quoted and explicitly attributed to him in order to rectify a misquotation by another author.[10] Although Yule was not explicitly mentioned in the 1933 paper by Frisch and Waugh, they utilized the notation for partial regression coefficients initially introduced by Yule in 1907, which by 1933 was well known due to the success of Yule's textbook.

In 1963, Lovell published a proof[11] considered more straightforward and intuitive. In recognition, people generally add his name to the theorem name.

References

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  1. ^ Frisch, Ragnar; Waugh, Frederick V. (1933). "Partial Time Regressions as Compared with Individual Trends". Econometrica. 1 (4): 387–401. doi:10.2307/1907330. JSTOR 1907330.
  2. ^ Lovell, M. (1963). "Seasonal Adjustment of Economic Time Series and Multiple Regression Analysis". Journal of the American Statistical Association. 58 (304): 993–1010. doi:10.1080/01621459.1963.10480682.
  3. ^ Lovell, M. (2008). "A Simple Proof of the FWL Theorem". Journal of Economic Education. 39 (1): 88–91. doi:10.3200/JECE.39.1.88-91. S2CID 154907484.
  4. ^ Hayashi, Fumio (2000). Econometrics. Princeton: Princeton University Press. pp. 18–19. ISBN 0-691-01018-8.
  5. ^ Davidson, James (2000). Econometric Theory. Malden: Blackwell. p. 7. ISBN 0-631-21584-0.
  6. ^ Mosteller, F.; Tukey, J. W. (1977). Data Analysis and Regression a Second Course in Statistics. Addison-Wesley.
  7. ^ Peng, Ding (2021). "The Frisch--Waugh--Lovell theorem for standard errors". Statistics and Probability Letters. 168: 108945.
  8. ^ a b c Yule, George Udny (1907). "On the Theory of Correlation for any Number of Variables, Treated by a New System of Notation". Proceedings of the Royal Society A. 79 (529): 182–193. doi:10.1098/rspa.1907.0028. hdl:2027/coo.31924081088423.
  9. ^ Yule, George Udny (1932). An Introduction to the Theory of Statistics 10th edition. London: Charles Griffin &Co.
  10. ^ a b Frisch, Ragnar; Mudgett, B. D. (1931). "Statistical Correlation and the Theory of Cluster Types" (PDF). Journal of the American Statistical Association. 21 (176): 375–392. doi:10.1080/01621459.1931.10502225.
  11. ^ Lovell, M. (1963). "Seasonal Adjustment of Economic Time Series and Multiple Regression Analysis". Journal of the American Statistical Association. 58 (304): 993–1010. doi:10.1080/01621459.1963.10480682.

Further reading

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