Regression Analysis

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Regression Analysis

Regression analysis is a statistical procedure for

analyzing associative relationships between a metric dependent variable and one

or more independent variables (Galton, 1885; Johnson and Wichern, 2007; Malhotra, 2007; Stigler, 1986; Woolridge, 2009).

It can be used in the following ways:

1.

Determine

whether the independent variables explain a significant variation in the

dependent variable: whether a relationship exists.

2.

Determine

how much of the variation in the dependent variable can be explained by the

independent variables: strength of the relationship.

3.

Determine

the structure of the relationship: the mathematical equation relating the

independent and dependent variables.

4.

Predict

the values of the dependent variable.

5.

Control

for other independent variables when evaluating the contributions of a specific

variable or set of variables.

Regression can be simple (bivariate) and multiple.

Simple

Regression

Simple

(Bivariate) regression is

a procedure for deriving a mathematical relationship, in the form of an

equation, between a single metric dependent variable and a single metric

independent variable.

The following equation defines the simple linear regression model:

y = ß0 + ß1x + u

Terminology for Simple Regression:

Y X

Dependent

Variable Independent

Variable

Explained

Variable Explanatory

Variable

Response

Variable Control

Variable

Predicted

Variable Predictor

Variable

Regressand Regressor

Statistics Associated with Simple Regression Analysis:

Simple regression model: y

= ß0 + ß1x + u

Where y = dependent variable; X = independent

variable; ß0 = intercept of the line; C = slope of the

line; and u= error term associated with the observation

Coefficient

of determination r2: measures the strength of association. It varies between 0 and 1 and

signifies the proportion of the total variation in y that is accounted for the

variation in X.

Estimated

or predicted value:

i = a + bx ; where ˆ

i is the predicted value of y; and a and b are stimators of

ß0 and ß1 respectively.

Regression

coefficient: the

estimated parameter b is usually

referred to as the non-standardized regression coefficient.

Scattergram: a scatter diagram is a plot of the values of two

variables for all the cases of observations.

Standard

error of estimate:

this statistic SEE is the standard deviation of the actual y values from the predicted

i values.

Standard

error: the standard

deviation of b, SEb

Standardized

regression coefficient: also

termed the beta coefficient or beta weight; is the slope obtained by the

regression of Y on X when the data are standardized.

Sum

of squared error:

the distances of all the points from the regression line are squared and added

together to arrive at the sum of squared errors, which is a measure of total

error ∑e2

t

statistic: a t

statistic with n – 2 degrees of freedom can be used to test the null hypothesis

that no linear relationship exists between X and y, or H0: ß1 =

0, where: t= b/SEb

Least

square procedure:

a technique used for fitting a straight line to a scattergram by minimizing the

square of the vertical distances of all the points from the line; and to

maximize the correlation between the actual values of Y and the predicted

values

.

Multiple Regression

Multiple regression: a statistical technique that simultaneously develops a

mathematical relationship between two or more independent variables and an

interval-scaled dependent variable.

eg: Are consumers’ perceptions of quality determined

by their perceptions of prices, brand image, and brand attributes?

Multiple

regression model: y = ß0 + ß1x1

+ ß2x2 + ß3x3 + u

Statistics associated with multiple regression:

Adjusted R2: coefficient of multiple determination, is adjusted for

the number of independent variables and the sample size to account for

diminishing returns. After the first few variables, the additional independent

variables do not make much contribution.

Coefficient of multiple

determination: measures

the strength of association.

F test: is used to test the null hypothesis that the

coefficient of multiple determination in the population R2 is zero.

H0: ß1 = ß2 = ß3 = ßk =

0 The test has an F distribution with k

and (n –k – 1) degrees of freedom.

Partial F test: the significance of a partial regression coefficient ßi

of Xi may be tested using an incremental F statistic. The

incremental F statistic is based on the increment in the explained sum of

squares resulting from the addition of the independent variable Xi to

the regression equation after all the other independent variables have been

included.

Partial regression

coefficient: the partial

regression coefficient b1, denotes the change in the predicted

value

per unit change in X1 when

the other independent variables, X2 to Xk are held

constant.

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