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Yi 1 2 X i ui
Yi b1 b2 X i
b2
X X Y Y
X X
i
Suppose that the units of measurement of Y or X are changed. How will this affect the
regression results? Intuitively, we would anticipate that nothing of substance will be
changed, and this is correct.
Yi 1 2 X i ui
Yi b1 b2 X i
b2
X X Y Y
X X
i
We will demonstrate this for the estimates of the regression coefficients in this section, and
we will trace the implications for the rest of the regression output in due course. We begin
by supposing that the true and fitted models are as shown above.
Yi 1 2 X i ui
Yi b1 b2 X i
b2
Yi* 1 2Yi
X X Y Y
X X
i
We now suppose that the units of measurement of Y are changed, with the new measure, Y*,
being a linear function of the old one.
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16/05/2016
Yi 1 2 X i ui
b2
Yi b1 b2 X i
Yi* 1 2Yi
X X Y Y
X X
i
Yi 1 2 X i ui
b2
Yi b1 b2 X i
Yi* 1 2Yi
X X Y Y
X X
i
Yi 1 2 X i ui
b2
Yi b1 b2 X i
Yi* 1 2Yi
X X Y Y
X X
i
X X Y Y X X Y Y
X X
X X
X X Y Y X X Y Y b
X X
X X
b2*
2 i
2 i
i
2
2 2
16/05/2016
Yi 1 2 X i ui
b2
Yi b1 b2 X i
Yi* 1 2Yi
X X Y Y
X X
i
X X Y Y X X Y Y
X X
X X
X X Y Y X X Y Y b
X X
X X
b2*
2 i
2 i
i
2
2 2
Yi 1 2 X i ui
b2
Yi b1 b2 X i
Yi* 1 2Yi
X X Y Y
X X
i
X X Y Y X X Y Y
X X
X X
X X Y Y X X Y Y b
X X
X X
b2*
2 i
2 i
i
2
2 2
Yi 1 2 X i ui
b2
Yi b1 b2 X i
Yi* 1 2Yi
X X Y Y
X X
i
X X Y Y X X Y Y
X X
X X
X X Y Y X X Y Y b
X X
X X
b2*
2 i
2 i
i
2
2 2
We find that the new slope coefficient is equal to the original one, multiplied by 2.
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16/05/2016
Yi 1 2 X i ui
b2
Yi b1 b2 X i
Yi* 1 2Yi
X X Y Y
X X
i
X X Y Y X X Y Y
X X
X X
X X Y Y X X Y Y b
X X
X X
b2*
2 i
2 i
i
2
2 2
This is logical. A unit change in Y is the same as a change of 2 units in Y*. According to
the regression equation, a unit change in X leads to a change of b2 units in Y, so it should
lead to a change of 2b2 units in Y*.
10
Yi 1 2 X i ui
b2
Yi b1 b2 X i
Yi* 1 2Yi
X X Y Y
X X
i
X X Y Y X X Y Y
X X
X X
X X Y Y X X Y Y b
X X
X X
b2*
2 i
2 i
i
2
2 2
The effect on the intercept will be left as an exercise. The effect of a change in the units of
measurement of X will also be left as an exercise.
11
Yi 1 2 X i ui
Yi b1 b2 X i
b2
X X Y Y
X X
i
However, we will consider a special case of a change in the measurement of X. Often the
intercept in a regression equation has no sensible interpretation because X = 0 is distant
from the data range.
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120
100
80
60
40
20
0
-20
10 11 12 13 14 15 16 17 18 19 20
The earnings function discussed in the previous slideshow is an example, with the intercept
actually being negative.
13
Number of obs
F( 1,
538)
Prob > F
R-squared
Adj R-squared
Root MSE
=
=
=
=
=
=
540
112.15
0.0000
0.1725
0.1710
13.126
-----------------------------------------------------------------------------EARNINGS |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------S |
2.455321
.2318512
10.59
0.000
1.999876
2.910765
_cons | -13.93347
3.219851
-4.33
0.000
-20.25849
-7.608444
------------------------------------------------------------------------------
Number of obs
F( 1,
538)
Prob > F
R-squared
Adj R-squared
Root MSE
=
=
=
=
=
=
540
112.15
0.0000
0.1725
0.1710
13.126
-----------------------------------------------------------------------------EARNINGS |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------S |
2.455321
.2318512
10.59
0.000
1.999876
2.910765
_cons | -13.93347
3.219851
-4.33
0.000
-20.25849
-7.608444
------------------------------------------------------------------------------
The intercept is a meaningless negative number. Literally, it is the predicted level of hourly
earnings for those with zero years of schooling, but nobody in the sample had fewer than
seven years of schooling and only 31 had fewer than twelve years.
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16/05/2016
Yi 1 2 X i ui
Yi b1 b2 X i
b2
X i* X i X
X X Y Y
X X
i
Yi b1* b2* X i*
Sometimes it is useful to deal with this problem by defining X* as the deviation of X about
its sample mean.
16
Yi 1 2 X i ui
Yi b1 b2 X i
b2
X i* X i X
X X Y Y
X X
i
Yi b1* b2* X i*
*
i
X i X
X i nX
nX nX 0
1
X i* 0
n
X*
Note that, by definition, the sample sum of Xi* is 0, and hence the mean value of X* is zero..
17
Yi 1 2 X i ui
Yi b1 b2 X i
b2
X i* X i X
Yi b1* b2* X i*
X X Y Y
X X
i
X X Y Y X Y
X X
X
X X Y Y b
X X
b2*
*
i
i
* 2
*
i
*
i
*2
i
X* 0
16/05/2016
Yi 1 2 X i ui
Yi b1 b2 X i
b2
X i* X i X
Yi b1* b2* X i*
X X Y Y
X X
i
X X Y Y X Y
X X
X
X X Y Y b
X X
b2*
*
i
i
* 2
*
i
*
i
*2
i
X* 0
b Y b X Y
*
1
*
2
The intercept is now the fitted value of Y at the sample mean of X. This is the sample mean
of Y and it may be more informative for analytical purposes.
19
We will investigate the effect of demeaning schooling int he wage equation example. First,
we find the sample mean. (In Stata, we use the sum command.) We find that the mean is
13.67 years, and we define a new variable SDEV by subtracting 13.67 from S.
20
Number of obs
F( 1,
538)
Prob > F
R-squared
Adj R-squared
Root MSE
=
=
=
=
=
=
540
112.15
0.0000
0.1725
0.1710
13.126
-----------------------------------------------------------------------------EARNINGS |
Coef.
Std. Err.
t
P>|t|
[95% Conf. Interval]
-------------+---------------------------------------------------------------SDEV |
2.455321
.2318512
10.59
0.000
1.999876
2.910765
_cons |
19.63077
.5648401
34.75
0.000
18.5212
20.74033
------------------------------------------------------------------------------
Here is the output using SDEV instead of S. The intercept, 19.63, now gives the predicted
earnings of those with mean schooling.
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16/05/2016
Comparing the new output with the original, we see that, apart from the standard error and t
22
120
100
80
60
40
20
-8
-7
-6
-5
-4
-3
-2
-1
-20
This is exactly as one would expect. The only effect of the demeaning of S is to move the
vertical axis to the point that was formerly 13.67. As a consequence, the intercept becomes
19.63. Otherwise, the regression line is unaffected.
23