Note: The following originally appeared in Stata Technical
Bulletin, issue 20, July 1994.

Title | Clarification on analytic weights with linear regression | |

Author | William Gould, StataCorp |

A popular request on the help line is to describe the effect of specifying
**[aweight=***exp***]** with
**regress** in terms of transformation of
the dependent and independent variables. The mechanical answer is that typing

. regressy x_1 x_2> [aweight=n]

is equivalent to estimating the model:

\[ y_j \sqrt{n_j} = \beta_o \sqrt{n_j} + \beta_1 x_{1 j} \sqrt{n_j} + \beta_2 x_{2j} \sqrt{n_j} + u_j \sqrt{n_j} \]
This regression will reproduce the coefficients and covariance matrix
produced by the **aweight**ed regression. The mean square errors
(estimate of the variance of the residuals) will, however, be different.
The transformed regression reports \( s_t^2 \),
an estimate of
Var\( (u_j \sqrt{n_j}) \). The
**aweight**ed regression reports
\( s_a^2 \), an estimate of
Var\( (u_j \sqrt{n_j} \sqrt{N/\sum_k n_k}) \), where
*N* is the number of observations. Thus,

\[ s_a^2 = \frac{N}{\sum_k n_k} s_t^2 = \frac{s_t^2}{\bar{n}} \qquad \qquad \qquad (1) \]

The logic for this adjustment is as follows: Consider the model:

\[ y = \beta_o + \beta_1 x_1 + \beta_2 x_2 + u \]
Assume that, were this model estimated on individuals,
Var(*u*)=\( \sigma _u^2 \),
a constant. Assume that individual data are not available;
what is available are averages
\( (\bar{y}_j, \bar{x}_{1 j}, \bar{x}_{2j}) \), for *j* =
1,...,*N*, and that each average is calculated over
\( n_j \) observations.
Then it is still true that

where \( \bar{u}_j \) is the average of \( n_j \) mean 0, variance \( \sigma _u^2 \) deviates, and so has variance \( \sigma _u^2 = \sigma _u^2/n_j \). Thus, multiplying through by \( \sqrt{n_j} \) produces

\[ \bar{y}_j \sqrt{n_j} = \beta_o \sqrt{n_j} + \beta_1 \bar{x}_{1 j} \sqrt{n_j} + \beta_2 \bar{x}_{2 j} \sqrt{n_j} + \bar{u}_j \sqrt{n_j} \]
and Var\( (u_j \sqrt{n_j}) = \sigma _u^2 \). The mean
square error \( s_t^2 \)
reported by estimating this transformed regression is an estimate of
\( \sigma _u^2 \). Alternatively,
the coefficients and covariance matrix could be obtained by **aweight**ed
**regress**. The only difference would be in the reported mean square
error, which per equation 1 is
\( \sigma _u^2 / \: \bar{n} \). On average,
each observation in the data reflects the averages calculated over
\( \bar{n} = \sum_k n_k/N \) individuals, and
thus this reported mean square error is the average variance of an
observation in the dataset. One can retrieve the estimate of
\( \sigma _u^2 \) by
multiplying the reported mean square error by
\( \bar{n} \).

More generally, **aweight**s are used to solve general heteroskedasticity
problems. In these cases, one has the model

and the variance of \( u_j \) is thought to be proportional to \( a_j \). If the variance is proportional to \( a_j \), it is also proportional to \( \alpha a_j \), where \( \alpha \) is any positive constant. Not quite arbitrarily, but with no loss of generality, let us choose \( \alpha = \sum_k(1/a_k)/N \), the average value of the inverse of \( a_j \). We can then write Var\((u_j) = k\alpha a_j\sigma^2 \), where \( k \) is the constant of proportionality that is no longer a function of the scale of the weights.

Dividing this regression through by the \( \sqrt{a_j} \),

\[ y_j/\sqrt{a_j} = \beta_o/\sqrt{a_j} + \beta_1 x_{1 j}/\sqrt{a_j} + \beta_2 x_{2j}/\sqrt{a_j} + u_j/\sqrt{a_j} \]produces a model with Var\( (u_j/\sqrt{a_j}) = k\alpha \sigma^2 \), which is the constant part of Var\( (u_j )\). Notice in particular that this variance is a function of \( \alpha \), the average of the reciprocal weights. If the weights are scaled arbitrarily, then so is this variance.

We can also estimate this model by typing:

. regressy x_1 x_2[aweight=1/a]

This command will produce the same estimates of the coefficients and covariance matrix; the reported mean square error is, per equation 1, \( [ N/ \sum_k (1/a_k) ] k \alpha \sigma^2 = k \sigma^2 \). This variance is independent of the scale of \( a_j \).