Regression Analysis

Regression analysis is a mathematical measure of the averages relationship between two or more variable in terms of the original units of data. Types of Regression (i) Simple Regression (Two Variable at a time) (ii) Multiple Regression (More than two variable at a time) Linear Regression: If the regression curve is a straight line then there is a linear regression between the variables .

Non-linear Regression/ Curvilinear Regression: If the regression curve is not a straight line then there is a non-linear regression between the variables.

Simple Linear Regression Model & its Estimation

A simple linear regression model is based on a single independent variable and its general form is:

Yt X t t
Here

Slope/ Regression Coefficients

Intercepts

t
(i)

Yt = dependent variable or regressands X t = independent variable or regressor

= random error or disturbance term

Importance of error

t term:

It captures the effect of on the dependent variable of all variable not included in the model. (ii) It captures any specification error related to assumed linear functional form. (iii) It captures the effects of unpredictable random componenets present in the dependent variable.

Estimation of the Model

Yt Xt Sales Adver Exp (thousands (million of of Unit) Rs.)
37 48 45 36 25 55 63 4.5 6.5 3.5 3 2.5 8.5 7.5

t Y

t X

t yt Yt Y

t xt X t X

xtyt

xt2

=309/ 7

36/7

-7.14286 3.857143 0.857143 -8.14286 -19.1429 10.85714 18.85714

-0.64286 1.357143 -1.64286 -2.14286 -2.64286 3.357143 2.357143

4.591837 5.234694 -1.40816 17.44898 50.59184 36.44898 44.44898

0.413265 1.841837 2.69898 4.591837 6.984694 11.27041 5.556122

44.1428

5.1428

xt yt =157.37

xt 2 = 33.354

Yt =309

Xt = 36

Estimation of the Model

x y x
t 2 t

157.357 4.717 33.354

X 44.143 (4.717)(5.143) 19.882 Y

Then the estimated simple linear regression model is

Yt 19.882 4.717 X t

x y x
2 2 t

157.357 4.717 33.354

X 44.143 (4.717)(5.143) 19.882 Y

Yt 19.882 4.717 X t

General Formula for First Order Coefficients

rYX .W

rXY rXW rYW

2 2 (1 rXW )(1 rYW )

General Formula for Second Order Coefficients

rYX .WO

rXY .O rXW .O rYW .O (1 r

2 XW .O

)(1 r

2 YW .O

Partial Correlation
Remarks: 1. Partial correlation coefficients lies between -1 & 1 2. Correlation coefficients are calculated on the bases of zero order coefficients or simple correlation where no variable is kept constant. Limitation: 1. In the calculation of partial correlation coefficients, it is presumed that there exists a linear relation between variables. In real situation, this condition lacks in some cases. 2. The reliability of the partial correlation coefficient decreases as their order goes up. This means that the second order partial coefficients are not as dependable as the first order ones are. Therefore, it is necessary that the size of the items in the gross correlation should be large. 3. It involves a lot of calculation work and its analysis is not easy.

Partial Correlation
Example: From the following data calculate 12.3 x1 : 4 0 1 1 1 3 x2 : 2 0 2 4 2 3 x3 : 1 4 2 2 3 0
Solution:
4 3 4 1 0 0

X1

16 2, 2

X2

16 2 and 2

X3

16 2 2

Partial Correlation

Multiple Correlation
The fluctuation in given series are not usually dependent upon a single factor or cause. For example wheat yields is not only dependent upon rain but also on the fertilizer used, sunshine etc. The association between such series and several variable causing these fluctuation is known as multiple correlation. It is also defined as the correlation between several variable. Co-efficient of Multiple Correlation: Let there be three variable X1, X2 and X3. Let X1 be dependent variable, depending upon independent variable , X2 and X3. The multiple correlation coefficient are defined as follows:
R1.23 = Multiple correlation with X1 as dependent variable and X2. and X3. , as independent variable R2.13 = Multiple correlation with X2 as dependent variable and X1. and X3. , as independent variable R3.12 = Multiple correlation with X3 as dependent variable and X1. and X2 , as independent variable

Calculation of Multiple Correlation Coefficient

General Formula

For example

Remarks
Multiple correlation coefficient is a non-negative coefficient. It is value ranges between 0 and 1. It cannot assume a minus value. If R1.23 = 0, then r12 = 0 and r13=0 R1.23 r12 and R1.23 r13 R1.23 is the same as R1.32 (R1.23 )2 = Coefficient of multiple determination. If there are 3 independent variable and one dependent variable the formula for finding out the multiple correlation is

R1.234 1 (1 r 214 )(1 r 212.3 )(1 r 212.34 )

Limitation

Advantages of Multiple Correlation

Example
Given the following data X1: 3 5 X2: 16 10 X3: 90 72 6 7 54 8 4 42 12 3 30 14 2 12

Compute coefficients of correlation of X3 on X1 and X2

Example

Example

Types of Correlation
r12.3 is the correlation between variables 1 and 2 with variable 3 removed from both variables. To illustrate this, run separate regressions using X3 as the independent variable and X1 and X2 as dependent variables. Next, compute residuals for regression...