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Chap.2 MultipleRegression

econometrics

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Gebyaw Demeke Aniley
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8 views

Chap.2 MultipleRegression

econometrics

Uploaded by

Gebyaw Demeke Aniley
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Chapter 2

Multiple Regression
 Multiple Regression Model
 Least Squares Method
 Multiple Coefficient of
 Determination
Model Assumptions
 Testing for Significance
 Using the Estimated Regression
Equation
for Estimation and Prediction

© 2008 Thomson South-Western. All Rights Reserved 1


Multiple Regression Model

 Multiple Regression Model


The equation that describes how the
dependent variable y is related to the
independent variables x1, x2, . . . xp and an error
term is:
y = 0 + 1x1 + 2x2 + . . . + pxp + 

where:
0, 1, 2, . . . , p are the parameters, and
 is a random variable called the error term

© 2008 Thomson South-Western. All Rights Reserved 2


Multiple Regression Equation

 Multiple Regression Equation


The equation that describes how the
mean value of y is related to x1, x2, . . . xp
is:
E(y) = 0 + 1x1 + 2x2 + . . . + pxp

© 2008 Thomson South-Western. All Rights Reserved 3


Estimated Multiple Regression Equation

 Estimated Multiple Regression Equation

y =^b0 + b1x1 + b2x2 + . . . + bpxp

A simple random sample is used to compute


sample statistics b0, b1, b2, . . . , bp that are
used as the point estimators of the parameters
 0,  1,  2, . . . ,  p .

© 2008 Thomson South-Western. All Rights Reserved 4


Estimation Process

Multiple Regression Model


Sample Data:
E(y) = 0 + 1x1 + 2x2 +. . .+ pxp + 
x1 x2 . . . xp y
Multiple Regression Equation
. . . .
E(y) = 0 + 1x1 + 2x2 +. . .+ pxp . . . .
Unknown parameters are
 0,  1,  2, . . . ,  p

Estimated Multiple
b0 , b1 , b2 , . . . , bp Regression Equation
provide estimates of yˆ  b0  b1x1  b2 x2  ...  bpxp
 0,  1,  2, . . . ,  p Sample statistics are
b0 , b1 , b2 , . . . , bp

© 2008 Thomson South-Western. All Rights Reserved 5


Least Squares Method

 Least Squares Criterion

min  (yi  yˆi )2

 Computation of Coefficient Values


The formulas for the regression coefficients
b0, b1, b2, . . . bp involve the use of matrix algebra.
We will rely on computer software packages to
perform the calculations.

© 2008 Thomson South-Western. All Rights Reserved 6


Multiple Regression Model

 Example: Programmer Salary Survey


A software firm collected data for a sample
of 20 computer programmers. A suggestion
was made that regression analysis could
be used to determine if salary was related
to the years of experience and the score
on the firm’s programmer aptitude test.
The years of experience, score on the
aptitude
test, and corresponding annual salary
($1000s) for a
sample of 20 programmers is shown on the
next
slide.
© 2008 Thomson South-Western. All Rights Reserved 7
Multiple Regression Model

Exper. Score Salary Exper. Score Salary


4 78 24.0 9 88 38.0
7 100 43.0 2 73 26.6
1 86 23.7 10 75 36.2
5 82 34.3 5 81 31.6
8 86 35.8 6 74 29.0
10 84 38.0 8 87 34.0
0 75 22.2 4 79 30.1
1 80 23.1 6 94 33.9
6 83 30.0 3 70 28.2
6 91 33.0 3 89 30.0

© 2008 Thomson South-Western. All Rights Reserved 8


Multiple Regression Model

Suppose we believe that salary (y) is


related to the years of experience (x1) and the
score on
the programmer aptitude test (x2) by the
following
y = 0 + 1x1 + 2x2 + 
regression model:
where
y = annual salary ($1000)
x1 = years of experience
x2 = score on programmer aptitude test

© 2008 Thomson South-Western. All Rights Reserved 9


Solving for the Estimates of 0, 1, 2

Least Squares
Input Data Output
x1 x2 Computer b0 =
y Package b1 =
for Solving
4 78 b2 =
Multiple
24
Regression R2 =
7 100
43 Problems etc.
. .
.
. .
© 2008 Thomson. South-Western. All Rights Reserved 10
Solving for the Estimates of 0, 1, 2

 Excel’s Regression Equation Output


A B C D E
38
39 Coeffic. Std. Err. t Stat P-value
40 Intercept 3.17394 6.15607 0.5156 0.61279
41 Experience 1.4039 0.19857 7.0702 1.9E-06
42 Test Score 0.25089 0.07735 3.2433 0.00478
43
Note: Columns F-I are not shown.

© 2008 Thomson South-Western. All Rights Reserved 11


Estimated Regression Equation

SALARY
SALARY =
= 3.174
3.174 +
+ 1.404(EXPER)
1.404(EXPER) +
+ 0.251(SCORE)
0.251(SCORE)

Note: Predicted salary will be in thousands of dollars.

© 2008 Thomson South-Western. All Rights Reserved 12


Interpreting the Coefficients

In multiple regression analysis, we


interpret each
regression coefficient as follows:
bi represents an estimate of the change in y
corresponding to a 1-unit increase in xi when all
other independent variables are held constant.

© 2008 Thomson South-Western. All Rights Reserved 13


Interpreting the Coefficients

b
b11 =
= 1.404
1.404

Salary is expected to increase by $1,404 for


each additional year of experience (when the
variable
score on programmer attitude test is held
constant).

© 2008 Thomson South-Western. All Rights Reserved 14


Interpreting the Coefficients

b
b22 =
= 0.251
0.251

Salary is expected to increase by $251 for


each
additional point scored on the programmer
aptitude
test (when the variable years of experience is
held
constant).

© 2008 Thomson South-Western. All Rights Reserved 15


Multiple Coefficient of Determination

 Relationship Among SST, SSR, SSE

SST = SSR +
SSE

 i
( y  y )2
= i
( ˆ
y  y )2
+  i i
( y  ˆ
y )2

where:
SST = total sum of squares
SSR = sum of squares due to regression
SSE = sum of squares due to error

© 2008 Thomson South-Western. All Rights Reserved 16


Multiple Coefficient of Determination

 Excel’s ANOVA Output


A B C D E F
32
33 ANOVA
34 df SS MS F Significance F
35 Regression 2 500.3285 250.1643 42.76013 2.32774E-07
36 Residual 17 99.45697 5.85041
37 Total 19 599.7855
38
SSR
SST

© 2008 Thomson South-Western. All Rights Reserved 17


Multiple Coefficient of Determination

R2 = SSR/SST

R2 = 500.3285/599.7855 = .83418

© 2008 Thomson South-Western. All Rights Reserved 18


Adjusted Multiple Coefficient
of Determination

n 1
Ra2 2
 1  (1  R )
n  p 1

2 20  1
R 1  (1  .834179)
a  .814671
20  2  1

© 2008 Thomson South-Western. All Rights Reserved 19


Assumptions About the Error Term 

The error  is
The error is aa random
random variable
variable with
with mean
mean of
of zero.
zero.

The
The variance of  ,, denoted
variance of by 
denoted by 22,, is
is the
the same
same for
for all
all
values
values of
of the
the independent
independent variables.
variables.

The
The values of  are
values of are independent.
independent.

The error  is
The error is aa normally
normally distributed
distributed random
random variable
variable
reflecting
reflecting the
the deviation
deviation between
between thethe yy value
value and and the the
expected
expected value
value ofof yy given by 00 +
given by + 11xx11 +
+ 22xx22 + + pp
+ .. .. +

© 2008 Thomson South-Western. All Rights Reserved 20

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