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Dami variables
Definition:
“In regression analysis it frequently happen that dependent variable is not only influenced
by variables which can be quantified (Cal in NO) on some well known scale like income,
output, price and height but also those variables which are qualitative in nature like
gender, race, color ,religion , war and peace”
Explanation:
Since such qualitative variables usually indicate the presence and absence of a quality or
attribute such as
Male or Female
Black and white
Exp:
0 May indicate the person is female
1 May indicate the person is Male
Multi co linearity
Questions
Answers
Suppose the H- school grades of student depends upon the following variables
Y = the grade of the student
X2 = Family income
X3 = No of hour of study per day
X4 = the no of hours of study per week
7X3=X4
This gives rise to perfect colinearity in model therefore OLS estimates (β 1, β 2, β 3) of
this model are not possible. Interpretation of β 2, β 3 are not possible.
Consequences of multicolenearty
• The value of t coefficients is very small but the value R2 is very high.
Note:
For Significance check T-Test
For Importance R2
For Overall goodness of model K-Test
Detection of multicolenearty
If simple co relation coefficient b/w two independent variable is higher than the practical
co relation or multiple co- relation then it is a problem of multicolenearty.
r>R
r = simple co relationship
R = Partial
4. What are the remedial measures?
• For casting
• Structural analysis
Heteroskedasticity
Questions
Introduction
If all the assumptions of OLS are satisfied the OLS estimates are blue. However if
anyone of assumption is violated the estimates are no more blue.
Violation of the assumptions regarding variance of error term has very serious problems.
Variance of (ε) =
• But if the variance is not constant then the problem of hetro is said to be
present
Variance of (ε) =
2. Major causes of heteroskedasticity
t = β ^2 / S.E (β ^2)
if variance of β ^2 is bigger because of hetro then S.E of β ^2 will also bigger when S.E
is bigger then the value of t will be smaller and that situation you fail to reject H0
Graphical
In this method we plot the square of error against time. And by inspection we can
determine whether hetro is present or not
Mathematical method
3. Test Ho by t-test
t = rs (n-2)
(1- rs2)
4. if t is significant mean tcal > ttab reject Ho other wise fail to reject
Example
2
Y X Ŷ Є =Y-Ŷ ΙЄΙ rank of ΙЄΙ rank of ΙЄΙ d=rank of ΙЄΙrank of ΙЄΙ d
12.4 12.1 2 5 -3 9
14.4 21.4 1 1 0 0
14.6 18.7 7 3 4 16
16 15.4 6 4 2 4
11.3 12.4 5 6 -1 1
10 10.4 4 7 -3 9
16.2 20.6 3 2 1 1
Є = α +β X+Є
If α and β are insignificant stop and conclude about the absence of hetro
But if β is significant tcal > ttab then we have to take following steps
1. transform the original variables into new
Y* = Y / X
X* = 1 / X
*
Є = Є/X
Standardize equation
*
Y* = β + α X* + Є
α = Σ x*y*
Σx*2
β =Y- α X