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02

Introduction of Regression Analysis

2. know the effective use of regression, and

3. enumerate uses and abuses of regression.

Regression analysis gives information on the relationship between a response

(dependent) variable and one or more (predictor) independent variables to the extent that

information is contained in the data. The goal of regression analysis is to express the

response variable as a function of the predictor variables. The duality of fit and the accuracy

of conclusion depend on the data used. Hence non-representative or improperly compiled

data result in poor fits and conclusions. Thus, for effective use of regression analysis one

must

1. investigate the data collection process,

2. discover any limitations in data collected, and

3. restrict conclusions accordingly.

Once a regression analysis relationship is obtained, it can be used to predict values of

the response variable, identify variables that most affect the response, or verify hypothesized

causal models of the response. The value of each predictor variable can be assessed through

statistical tests on the estimated coefficients (multipliers) of the predictor variables.

An example of a regression model is the linear regression model which is a linear

relationship between response variable, y and the predictor variable, xi , i 1,2..., n of the

form

y 0 1 x1 2 x2 ... n xn (1)

where

0 , 1 ....... n are regression coefficients (unknown model parameters), and

is the error due to variability in the observed responses.

06.02.1

06.02.2 Chapter 06.02

Example 1

In the transformation of raw or uncooked potato to cooked potato, heat is applied for

some specific tune. One might postulate that the amount of untransformed portion of the

starch ( y ) inside the potato is a linear function of time ( t ) and temperature ( ) of

cooking. This is represented as

y 0 1t 2 (2)

Linear as used in linear regression refers to the form of occurrence of the unknown

parameters, 1 and 2 as ,simple linear multipliers of the predictor variable. Thus, the two

equations below are also both linear.

y 0 1t 2t 3 (3)

y 0 1t 2 (4)

Unlike regression, correlation analysis assesses the simultaneous variability of a

collection of variables. The relationship is not directional and interest is not on how some

variables respond to others but on how they are mutually associated. Thus, simultaneous

variability of a collection of variables is referred to as correlation analysis.

Three uses for regression analysis are for

1. prediction

2. model specification and

3. parameter estimation.

Regression analysis equations are designed only to make predictions. Good

predictions will not be possible if the model is not correctly specified and accuracy of the

parameter not ensured. However, accurate prediction and model specification require that all

relevant variables be accounted for in the data and the prediction equation be defined in the

correct functional form for all predictor variables.

Parameter estimation is the most difficult to perform because not only is the model

required to be correctly specified, the prediction must also be accurate and the data should

allow for good estimation. For example, multicolinearity creates a problem and requires that

some estimators may not be used. Thus, limitations of data and inability to measure all

predictor variables relevant in a study restrict the use of prediction equations.

Let us examine three common abuses of regression analysis.

1. Extrapolation

2. Generalization

3. Causation

Extrapolation

If you were dealing in the stock market or even interested in it, then you might

remember the stock market crash of March 2000. During 1997-1999, investors thought they

Introduction to Regression Analysis 06.02.3

would double their money every year. They started buying fancy cars and houses on credit,

and living the high life. Little did they know that the whole market was hyped on speculation

and little economic sense. The Enron and MCI financial fiascos soon followed.

Let us look if we could have safely extrapolated the NASDAQ index 1 from past

years. Below is the table of NASDAQ index, S , as a function of end of year number, t

(Year 1 is the end of year 1994, and Year 6 is the end of year 1999).

Year Number ( t NASDAQ Index ( S

) )

1 (1994) 752

2 (1995) 1052

3 (1996) 1291

4 (1997) 1570

5 (1998) 2193

6 (1999) 4069

A relationship S a 0 a1t a 2 t between the NASDAQ index, S , and the year number, t ,

2

S 168.14t 597.37t 1361.8 . The data and the regression line are shown in Figure 1.

2

The data is given only for Years 1 through 6 and it is desired to calculate the value for t 6 .

This is extrapolation outside the model data. The error inherent in this model is shown in

Table 2 and Figure 2. Look at the Year 7 and 8 that was not included in the data the error

between the predicted and actual values is 119% and 277%, respectively.

Year NASDAQ Predicted Absolute Relative

1

NASDAQ (National Association of Securities Dealers Automated Quotations) index is a composite index

based on the stock market value of 3,000 companies. The NASDAQ index began on February 5, 1971 with a

base value of 100. Twenty years later in 1995, NASDAQ index crossed the 1000 mark. It rose as high as 5132

on March 10, 2000 and currently is at a value of 2282 (February 19, 2006).

06.02.4 Chapter 06.02

Number ( Index ( S

Index True Error (%)

t) )

1 (1994) 752 933 24

2 (1995) 1052 840 20

3 (1996) 1291 1083 16

4 (1997) 1570 1663 6

5 (1998) 2193 2579 18

6 (1999) 4069 3831 6

7 (2000) 2471 5419 119

8 (2001) 1951 7344 276

This illustration is not exaggerated and it is important that a careful use of any given

model equations is always employed. At all times, it is imperative to infer the domain of

independent variables for which a given equation is valid.

Generalization

Generalization could arise when unsupported or over exaggerated claims are made. It

is not often possible to measure all predictor variables relevant in a study. For example, a

study carried out about the behavior of men might have inadvertently restricted the survey to

Caucasian men only. Shall we then generalize the result as the attributes of all men

irrespective of race? Such use of regression equation is an abuse since the limitations

imposed by the data restrict the use of the prediction equations to Caucasian men.

Misidentification

Finally, misidentification of causation is a classic abuse of regression analysis

equations. Regression analysis can only aid in the confirmation or refutation of a causal

model - the model must however have a theoretical basis. In a chemical reacting system in

Introduction to Regression Analysis 06.02.5

which two species react to form a product, the amount of product formed or amount of

reacting species vary with time. Although a regression equation of species concentration and

time can be obtained, one cannot attribute time as the causal agent for the varying species

concentration. Regression analysis cannot prove causality, rather it can only substantiate or

contradict causal assumptions. Anything outside this is an abuse of regression analysis

method.

This is the most popular method of parameter estimation for coefficients of regression

models. It has well known probability distributions and gives unbiased estimators of

regression parameters with the smallest variance.

We wish to predict the response to n data points ( x1 , y1 ), ( x 2 , y 2 ),......, ( x n , y n )

by a regression model given by

y f (x) (6)

where, the function f (x ) has regression constants that need to be estimated.

For example

f ( x ) a0 a1 x is a straight-line regression model with constants a 0 and a1

f ( x ) a0 e a1 x is an exponential model with constants a 0 and a1

f ( x ) a0 a1 x a2 x 2 is a quadratic model with constants a 0 , a1 and a2

A measure of goodness of fit, that is how the regression model f (x ) predicts the

response variable y is the magnitude of the residual, Ei at each of the n data points.

Ei yi f ( xi ), i 1,2,....n (7)

Ideally, if all the residuals Ei are zero, one may have found an equation in which

all the points lie on a model. Thus, minimization of the residual is an objective of obtaining

regression coefficients. In the least squares method, estimates of the constants of the models

are chosen such that minimization of the sum of the squared residuals is achieved, that is

n

minimize E

i 1

i

2

.

n

Why not for instance minimize the sum of the residual errors, E

i 1

i , or the sum of

n

the absolute values of the residuals, E

i 1

i ? Alternatively, constants of the model can be

chosen such that the average residual is zero without making individual residuals small. Will

any of these criteria yield unbiased parameters with the smallest variance? All of these

questions will be answered when we discuss linear regression in the next chapter (Chapter

06.03).

Regression

Topic Introduction to Regression

Summary Textbook notes for the introduction to regression

Major All engineering majors

06.02.6 Chapter 06.02

Date October 11, 2008

Web Site http://numericalmethods.eng.usf.edu

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