13 views

Uploaded by cons the

Ft Mba Section 3 Regression Sv(1)

- 24_3
- Economic Returns to Communist Party Membership-Evidence From Chinese Twins
- Por Qué No Debería Usar El Filtro HP, Hamilton
- Regression
- l10-Edu5950 Simple Regression Analysis
- Stastical Hydrology
- v8n2a11.pdf
- Social Influence and Consumption Evidence From The kuugkjgjdyen kljiasjdn zcxkczoozcxj zckhczjofdjofd
- lmodel2
- Using Stata
- 3211643
- regressionanalysis-110723130213-phpapp02.ppt
- Daily Soil Temperature Modeling Using 'PanelData' Concept
- Front page.doc
- Linear Regression
- 2014GV903-7-FY
- Cheming e Part I
- MCC 202.docx
- Linear Regression
- EViews Workshop

You are on page 1of 24

Bivariate Regression

Analysis and Forecasting

Section three

Paul Bottomley

Bottomleypa@cardiff.ac.uk

Silver, Ch.7, pp.116-121.

1

Regression Analysis

Regression is an obvious extension to correlation. It is

useful for building statistical models and making forecasts.

scatter plot lie to a straight line.

But two TV brands can have different price sensitivities

(slopes) yet have the same correlation. Only regression

can identify the best fitting lines.

Correlation also tells us nothing about causation.

But to undertake a regression, we must specify in

advance the direction of causation (X Y).

2

Dependent and Independent Variables

To estimate a regression, we must decide first which

variable is independent and which variable is dependent.

causes

X

Independent

Y

Dependent

Car age and Car Price

Number of ice creams sold and Temperature

Customer satisfaction and Brand loyalty.

If the labels are the wrong way round, the calculation

will be wrong, yet it does not matter for correlation!

3

Dependent and Independent Variables:

Some More Examples

Think of some possible independent variables (Xs) that

might explain / predict:

Number of children

Length of holiday (1 or 2 weeks)

Home or abroad

Number of cinema screens (distribution)

Oscar winning / nominated stars or director

Certification (U, PG, X-rated)

4

Equation of a Straight Line

Examples of straight lines include:

Y = 2Xif X is 1 then Y equals 2; if X = 2 then Y = 4 etc.

Y = 3 + 2X if X is 1 then Y equals 5, if X = 2 then Y = 7

All have the same general form

Sales

(Y) *

*

Yi a bX i

*

* * * *

a *

intercept b *

*

slope *

Price (X)

5

Interpreting Regression Lines

Salary Review

Annual Total Production Costs

Salary () Costs ()

Women

Men

b b

a a

1 unit 1 unit

Years of Quantity

Service / Output

a = starting salary a = fixed costs

b = annual increment b = marginal costs

6

What is the Best Straight Line?

We could draw a line on the scatter plot by hand, but

each person would draw a different best fitting line.

A more precise method is Ordinary Least Squares.

The vertical distances between the data points and the

line are called errors. With n data points, we have n

errors, denoted as e1, e2, e3,.. en,

Sales

*

(Y) *

* ei

* * *

*

* *

ek

*

*

Price (X) 7

What is the Best Straight Line?

Obviously, a good fitting line will have small errors.

For ej the line under-predicts sales for this model of TV.

For ek the line over-predicts sales for this model of TV.

Because errors can be positive or negative, so they dont

cancel each other out, we square each error.

Ordinary Least Squares (OLS) fits the line that minimises:

n

e e e ... e min e

2

1

2

2

2

3

2

n

2

i

i 1

The best fitting line becomes our model of the world.

8

The Regression Coefficients

Least squares estimates for the intercept (a) and slope (b)

n XY X Y Covariance XY

b

n X ( X )

2 2

Variance X

_

a Yb X

_

Y X

b

n n

These formula give the best fitting straight line. Calculations

are based on same table used for the correlation (r).

9

Demand for Nikkai Televisions

Sales (Y) Price (X) 250

213 132

200

192 181

168 200 150

Sales

160 149 100

119 191

50

96 163

79 220 0

0 50 100 150 200 250 300

74 186

Price ()

68 260

relationship between sales and price appears linear with

no obvious outliers (TV models that dont fit the pattern).

10

Nikkai: Sales = f(Price);

Correlation Coefficient Revisited

Sales (Y) Price (X) XY X2 Y2

213 132 28116 17424 45369

192 181 34752 32761 36864

168 200 33600 40000 28224

160 149 23840 22201 25600

119 191 22729 36481 14161

96 163 15648 26569 9216

79 220 17380 48400 6241

74 186 13764 34596 5476

68 260 17680 67600 4624

Totals

1169 1682 207509 326032 175775

11

Calculating Regression Coefficients

(9 * 207509) (1682 *1169)

r 0.656

[(9 * 326032) 1682 ][(9 *175775) 1169 ]

2 2

b

n X 2 ( X ) 2 (9 * 326032) 16822

_ _

1169 1682

a Yb X ( 0.94) 305.55

9 9

a = 305.55 (intercept) Beware, double negative!

12

Nikkai: Sales = f(Prices)

350

Intercept = 305.55

300

250

Unit Sales

200

150

Slope = -0.94

100

50

0

0 50 100 150 200 250 300 350

Price ()

Note: regression dips below horizontal X-axis when price > 325

13

Interpreting the Regression Line

Nikkai: Y^ = 305.55 0.94xPrice

^

B&0: Y = 207.57 0.09xPrice

Intercept (a) tells us the expected number of sales if the

price were zero: 306 units when giving TVs away!

Slope (b) tells us the impact of a one unit change in X on Y.

If price rises by 1 unit, we expect sales to fall by 0.94 units.

But, we must convert this into actual values of X and Y.

If price rises by 1, we expect sales to fall by 0.94 TV sets.

14

Interpreting the Regression Line

In this context, it shows the expected number of sales if the

price were zero (=0): 306 units when giving TVs away!

Slope (b) tells us the impact of a one unit change in X on Y.

If price rises by 1 unit, we expect sales to fall by 0.94 units.

In this context, considering the actual units of X and Y

If price rises by 1, we expect sales to fall by 0.94 TV sets.

^

B&0: Y = 207.57 0.09xPrice

1515

A More Complicated Example

Imagine a regression model of the relationship between

advertising expenditure (1000) and sales revenue (10,000).

^

Y = 1.20 + 0.54 x Ad_Spend

Intercept a: if ad_spend were zero, we would expect (^)

sales revenue to be 12,000 (1.2 x 10,000).

Slope b: if ad_spend increases by 1 unit, we expect sales

revenue to increase by 0.54 units.

Ad_spend rises by 1,000, sales revenue will rise by 5,400.

(0.54 x 10,000).

16

How Well Does the Regression Model

Predict / Forecast Sales ()?

We can use the regression to predict TV sales at different

prices by substituting values of X (prices) into the equation.

Q: What would expected sales be if price were 100?

^ = 305.55 (0.94x100) = 211.55 units

Y

All forecasts / predictions lie on the regression line, but the

regression doesnt necessarily pass through all data points.

17

17

How Well Does the Regression Model

Predict / Forecast Sales ()?

We can use the regression to predict TV sales at different

prices by substituting values of X (prices) into the equation.

^Y = 305.55 (0.94X) =

18

Nikkai: Actual vs. Predicted Sales

350

300

250

Unit Sales

200

150

100

50

0

0 50 100 150 200 250 300 350

P1 Price P2

132 to 260) as we must assume the relationship still holds true.

But the line will always pass through the mean of X and Y.

19

Coefficient of Determination (R2)

The R2 = correlation squared (r2). Index: range 0 to 1

association between Y and X, Total deviation(Yi Y)

and more confidence we have

in our predictions.

Y *

Unexplained

Shows proportion of variance in deviation (b)

Y explained by the regression Explained

line. (a)

^

Y deviation (a)

_ _

Unexplained variation between Y Y

data points and the line. This is

what we dont know. (b)

Nikkai: Regression Line

R2 = r2 = (-0.656)2 = 0.43 X

So 57% variance is unexplained whats missing from our model?

20

Some Thoughts and Reflections

Guidelines: With cross-sectional data an R2 of 0.4 is OK;

with time-series data an R2 should approach 0.8 or 0.9.

But, dont simply look at the fit (R2) of the model, and the

impact of the variable(s) included in the model...

Ask yourself: has the market researcher included the main

drivers? What variables are missing?

It would be more realistic to assume that sales depend on

price, advertising, price of competing products etc.

21

Problems and Assumptions

Underlying Regression Analysis

Issues affecting interpretation of regression coefficients.

Omitted variables

Use of dummy variables Try asking an

Non-linear relationships Econometrician!

multi-collinearity; serial correlation

heteroscedasticity; measurement error

distributed, with a mean of zero, and constant variance.

22

Are the Errors Normally Distributed

- Why Not Use Tukeys Box-Plot?

* Max. = 496.94

* Median = -78.07 200

* Q1 = -174.15 0

* Q3 = 196.34

-200

* IQR = 370.49

* Lower hinge = Q1 - (1.5*IQR)

-400

-600

Unstandardized Resid

23

Dr Saeed Heravi (An Econometrician)!

MBA dissertations with

quantitative emphasis

Time series forecasting

Other multivariate models

Cluster analysis for market

segmentation

Perceptual maps for brand

positioning

DEA for store performance

(e.g. Ann Summers)

24

- 24_3Uploaded byAditya Achmad Narendra Whindracaya
- Economic Returns to Communist Party Membership-Evidence From Chinese TwinsUploaded bymurtajih
- Por Qué No Debería Usar El Filtro HP, HamiltonUploaded bySantiago PA
- RegressionUploaded byparkchick
- l10-Edu5950 Simple Regression AnalysisUploaded byKhairul Affan Hassan
- Stastical HydrologyUploaded byovishalz
- v8n2a11.pdfUploaded byMir wanto
- Social Influence and Consumption Evidence From The kuugkjgjdyen kljiasjdn zcxkczoozcxj zckhczjofdjofdUploaded byAmith Raj
- lmodel2Uploaded byAmsalu Walelign
- Using StataUploaded bysakiaslam
- 3211643Uploaded bySpencer Claiborne
- regressionanalysis-110723130213-phpapp02.pptUploaded byHarshi Garg
- Daily Soil Temperature Modeling Using 'PanelData' ConceptUploaded by30/6/1984
- Front page.docUploaded byxirrienann
- Linear RegressionUploaded bykentbnx
- 2014GV903-7-FYUploaded byCarlos
- Cheming e Part IUploaded bype
- MCC 202.docxUploaded byRon Opulencia
- Linear RegressionUploaded byuser2127
- EViews WorkshopUploaded byIsuru Wijerathne
- Manajemen Biaya 03.pptUploaded byWhawhan Vierrania
- 07 Chapter 1Uploaded bysambi619
- 1-s2.0-S187704281200290X-main.pdfUploaded byAmalia Paraschiv
- 2019-CFA-Level-II-SmartSheet.pdfUploaded bymmqasmi
- Predicting Student Proficiency Test ScoresUploaded byJobeer Dahman
- Econ 2008 paperUploaded byMervyn Tang
- Factors Effecting Employee Turnover in Banking Sector.docxUploaded byanum
- syllabusUploaded byspmdoc
- Motivation, Empowerment, Service Quality and Polytechnic Students’ Level OfUploaded bysifera

- Financial and Managerial Accounting (77).pdfUploaded bycons the
- Financial and Managerial Accounting (83)Uploaded bycons the
- Financial and Managerial Accounting (85)Uploaded bycons the
- Financial and Managerial Accounting (77)Uploaded bycons the
- Financial and Managerial Accounting (76)Uploaded bycons the
- Financial and Managerial Accounting (79)Uploaded bycons the
- Financial and Managerial Accounting (73)Uploaded bycons the
- Financial and Managerial Accounting (82)Uploaded bycons the
- Financial and Managerial Accounting (72)Uploaded bycons the
- Financial and Managerial Accounting (81)Uploaded bycons the
- Financial and Managerial Accounting (75)Uploaded bycons the
- Financial and Managerial Accounting (80)Uploaded bycons the
- Financial and Managerial Accounting (78)Uploaded bycons the
- Financial and Managerial Accounting (74)Uploaded bycons the
- Financial and Managerial Accounting (87)Uploaded bycons the
- Financial and Managerial Accounting (59).pdfUploaded bycons the
- Financial and Managerial Accounting (58)Uploaded bycons the
- Financial and Managerial Accounting (68)Uploaded bycons the
- Financial and Managerial Accounting (62)Uploaded bycons the
- Financial and Managerial Accounting (70)Uploaded bycons the
- Financial and Managerial Accounting (67)Uploaded bycons the
- Financial and Managerial Accounting (69)Uploaded bycons the
- Financial and Managerial Accounting (64).pdfUploaded bycons the
- Financial and Managerial Accounting (61)Uploaded bycons the
- Financial and Managerial Accounting (71)Uploaded bycons the
- Financial and Managerial Accounting (57)Uploaded bycons the
- Financial and Managerial Accounting (60)Uploaded bycons the
- Financial and Managerial Accounting (56)Uploaded bycons the
- Financial and Managerial Accounting (65).pdfUploaded bycons the
- Financial and Managerial Accounting (63).pdfUploaded bycons the

- 3 0 kt keytermsUploaded byapi-291998889
- Model Question PaperUploaded byDapborlang Marwein
- BA 1040 Seminar 2 2014 - 2015Uploaded byS.L.L.C
- JN2XX-17.pdfUploaded byijasrjournal
- FWR-Research-on-Flowform-Effects-05.pdfUploaded byavisenic
- Simulation DESUploaded byoptisearch
- Assignment 3Uploaded bySiddhant Sanjeev
- Student Teacher InteractionsUploaded byswapnilnagare
- A Meta Analysis of Idealism and RealismUploaded bytcalex60
- Time_series Article 10-29Uploaded bygmurdzhev
- Bachelor of Business AdministrationUploaded byKamala Kanta Dash
- Two Sample Hotelling's T SquareUploaded byJoselene Marques
- 2. savingUploaded byMarzita Munir
- The Concise Adair on Communication and Presentation SkillsUploaded byrizcst9759
- computational information design.pdfUploaded byBibin Mathew Jose
- Eisenhardt 1989Uploaded byAce Cardeno
- Minitab CommandsUploaded byHenry Tom
- tmp2403.tmpUploaded byFrontiers
- Lottery Forecasting Secret Part 2Uploaded byrasaq
- Distribution Example2Uploaded byPriyaprasad Panda
- Deep Learning LectureUploaded byNhưHoaMạc
- ASTM D4772 09 Water AbsorbencyUploaded bySubramani Pichandi
- Minitab Demonstration for Chi-Square Goodness of Fit Test and Chi-Square Test of IndependenceUploaded byAji. Setiawan
- Annex II - Amc 20-29Uploaded byengpontelli
- A Practical Approach to Survey Sampling for Reseachers and Post GraduatesUploaded byKaweesaHenry
- Ej 919857Uploaded byMarko Nikolic
- mcomUploaded bygauravaggarwal50
- Jupyter Notebook ViewerUploaded bybaba
- Pricing and Revenue Monte Carlo Forecast ModelUploaded byHammouch Ayoub
- The Convex Feasibility Problem in Image RecoveryUploaded byFrabato El Mago