Introduction to Econometrics 3rd Edition by James Stock, Mark Watson

Exercise 20

Consider the regression model
where
and u i =
Suppose that
, are i.i.d. with mean 0 and variance 1 and are distributed independently of X j : for all i and j.
a. Derive an expression for

b. Explain how to estimate the model by GLS without explicitly inverting the matrix . ( Hint : Transform the model so that the regression errors are
)