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Derivation: Ordinary Least Squares Solution and Normal Equations

In a linear regression framework, we assume some output variable y is a linear combination of some independent input variables X plus some independent noise \epsilon. The way the independent variables are combined is defined by a parameter vector \beta:

\Large{\begin{array}{rcl} y &=& X \beta + \epsilon \end{array}}

We also assume that the noise term \epsilon is drawn from a standard Normal distribution:

\Large{ \begin{array}{rcl}\epsilon &\sim& N(0,I)\end{array}}

For some estimate of the model parameters \hat \beta, the model’s prediction errors/residuals e are the difference between the model prediction and the observed ouput values

\Large{\begin{array}{rcl} e = y - X\hat \beta \end{array}}

The Ordinary Least Squares (OLS) solution to the problem (i.e. determining an optimal solution for \hat \beta) involves minimizing the sum of the squared errors with respect to the model parameters, \hat \beta. The sum of squared errors is equal to the inner product of the residuals vector with itself \sum e_i^2 = e^Te :

\Large{\begin{array}{rcl} e^T e &=& (y - X \hat \beta)^T (y - X \hat \beta) \\  &=& y^Ty - y^T (X \hat \beta) - (X \hat \beta)^T y + (X \hat \beta)^T (X \hat \beta) \\  &=& y^Ty - (X \hat \beta)^T y - (X \hat \beta)^T y + (X \hat \beta)^T (X \hat \beta) \\  &=& y^Ty - 2(X \hat \beta)^T y + (X \hat \beta)^T (X \hat \beta) \\  &=& y^Ty - 2\hat \beta^T X^T y + \hat \beta^T X^T X \hat \beta \\  \end{array}}

To determine the parameters, \hat \beta, we minimize the sum of squared residuals with respect to the parameters.

\Large{\begin{array}{rcl} \frac{\partial}{\partial \beta} \left[ e^T e \right] &=& 0 \\  &=& -2X^Ty + 2X^TX \hat \beta \text{, and thus} \\  X^Ty &=& X^TX \hat \beta  \end{array}}

due to the identity \frac{\partial \mathbf{a}^T \mathbf{b}}{\partial \mathbf{a}} = \mathbf{b}, for vectors \mathbf{a} and \mathbf{b}. This relationship is matrix form of the Normal Equations. Solving for \hat \beta gives  the analytical solution to the Ordinary Least Squares problem.

\Large{\begin{array}{rcl} \hat \beta &=& (X^TX)^{-1}X^Ty \end{array}}

Boom.

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