The Nature of

Regression Analysis

Gujarati 4e, Chapter 1

Regression Analysis

 Regression is a main tool of econometrics.

 The term of regression was introduced by
Francis Galton (1886); Pearson and Lee (1903)
 tend to move
 Regression analysis is the study of the statistical
dependence of one variable, the dependent
variable, on one or more other variables, the
explanatory variables.

1/13/2020 Prepared by Sri Yani Kusumastuti 2

Regression Analysis

 The objective of analysis id to estimate and/or

predict the mean or average value of the
dependent variable on the basis of the known
of fixed (repeated sampling) value of the
explanatory variables.

1/13/2020 Prepared by Sri Yani Kusumastuti 3

Statistical vs Deterministic Relationship

 Regression analysis  statistical relationship 

random or stochastic variables, that is variables that
have probability distributions; there is random
variability in dependent variable that cannot be fully
explained no matter how many explanatory
variables we consider
 In functional or deterministic dependency  also
deal with variables, but these variables are not
random or stochastic

1/13/2020 Prepared by Sri Yani Kusumastuti 4

Regression vs Correlation

 Regression
 An asymmetry in the way the dependent and
explanatory variables are treated
 The dependent variable is assumed to be random or
stochastic
 The explanatory variables are assumed to have fixed
value (in repeated sampling)
 Correlation
 Two variables symmetrically
 Two variables are assumed to be random

1/13/2020 Prepared by Sri Yani Kusumastuti 5

Terminology and Notation
Dependent variable Explanatory variable
Explained variable Independent variable
Predictand Predictor
Regressand Regressor
Response Stimulus
Endogenous Exogenous
Outcome Covariate
Controlled variable Control variable

1/13/2020 Prepared by Sri Yani Kusumastuti 6

The nature and sources of data

 The success of regression analysis

depends on the availability of appropriate
data: nature, sources, and limitation of the
data
 Types of data
1. Time series data  stationary  if its mean and
variance do not vary systematically over time
2. Cross-section data  heterogeneity
3. Pooled data  panel

1/13/2020 Prepared by Sri Yani Kusumastuti 7

The nature and sources of data

 The source of data

 The data may be collected by a governmental
agency, an international agency (e.g. IMF or
World Bank), a private organization (e.g. the
Standard and Poor Corporation), or individual
 The data collected may be experimental (in
natural science) or nonexperimental (not subject
to the control of researcher)

1/13/2020 Prepared by Sri Yani Kusumastuti 8

The nature and sources of data

 The accuracy of data: the quality of the data

is often not that good.
1. Most social science data are nonexperimental
in nature  oservational errors
2. Even in experimental collected data errors of
measurement arise from approximations and
roundoffs
3. Survey  the problem of nonresponse 
selectivity bias

1/13/2020 Prepared by Sri Yani Kusumastuti 9

The nature and sources of data

4. The sampling methods used in obtaining the

data may vary so widely that it is often
difficult to compare the result obtained from
the various samples.
5. Economic data are generally available at a
highly aggregate level.
6. Because of confidentially, certain data can
be published only in highly aggregate form

1/13/2020 Prepared by Sri Yani Kusumastuti 10

The nature and sources of data

 The researcher should always keep in mind

that the result of research are only as good
as the quality of the data
 The measurement scale of variables
1. Ratio scale
2. Interval scale
3. Ordinal scale
4. Nominal scale

1/13/2020 Prepared by Sri Yani Kusumastuti 11

The nature and sources of data

 The researcher should clearly state

 the sources of the data used in the analysis;
 their definitions;
 their methods of collection; and
 any gap or omissions in the data as well as any
revisions in the data

1/13/2020 Prepared by Sri Yani Kusumastuti 12