Regression Assumptions

1
Regression Assumptions
2
Best Linear Unbiased Estimate (BLUE)

• If the following assumptions are met
• The Model is
• Complete
• Linear
• Additive
• Variables are
• measured at an interval or ratio scale
• without error
• The regression error term is
• unrelated to predictors
• normally distributed
• has an expected value of 0
• errors are independent
• homoscedasticity
• In a system of interrelated equations the errors
  are unrelated to each other
• Characteristics of OLS if sample is probability
  sample
• Unbiased
• Efficient

3
The Three Desirable Characteristics

• Unbiased
• E(b)ß b is the sample ß is the true,
  population coefficient
• On the average we are on target
• Efficient
• Standard error will be minimum
• Consistent
• As N increases the standard error decreases and
  closes in on the population value

4
Completeness
. regress API13 MEALS AVG_ED P_EL P_GATE EMER
DMOB if AVG_EDgt0 AVG_EDlt6, beta Source
SS df MS Number
of obs 10082 -------------------------------
------------- ------------------------------------
-- F( 6, 10075) 2947.08 Model
65503313.6 6 10917218.9 Prob gt F
0.0000 Residual 37321960.3 10075
3704.41293 R-squared
0.6370 ------------------------------------------
----------------------------------------- Adj
R-squared 0.6368 Total 102825274
10081 10199.9081 Root MSE
60.864 ------------------------------------------
--------------------------------------------------
---------------- API13 Coef.
Std. Err. t Pgtt
Beta --------------------------------------------
--------------------------------------------------
------------- MEALS .1843877 .0394747
4.67 0.000 .0508435
AVG_ED 92.81476 1.575453 58.91 0.000
.6976283 P_EL .6984374
.0469403 14.88 0.000
.1225343 P_GATE .8179836 .0666113
12.28 0.000 .0769699 EMER
-1.095043 .1424199 -7.69 0.000
-.046344 DMOB 4.715438
.0817277 57.70 0.000
.3746754 _cons 52.79082 8.491632
6.22 0.000
. ------------------------------------------------
--------------------------------------------------
----------
Meals
. regress API13 MEALS AVG_ED P_EL P_GATE EMER
DMOB PCT_AA PCT_AI PCT_AS PCT_FI PCT_HI PCT_PI
PCT_MR if AVG_EDgt0 AVG_EDlt6, beta Source
SS df MS
Number of obs 10082 -----------------------
--------------------------------------------------
----------- F( 13, 10068) 1488.01
Model 67627352 13 5202104
Prob gt F 0.0000 Residual
35197921.9 10068 3496.01926 R-squared
0.6577 ----------------------------------
-------------------------------------------------
Adj R-squared 0.6572 Total
102825274 10081 10199.9081 Root
MSE 59.127 -----------------------------
--------------------------------------------------
------------------------------- API13
Coef. Std. Err. t Pgtt
Beta --------------------------------
--------------------------------------------------
--------------------------- MEALS .370891
.0395857 9.37 0.000
.1022703 AVG_ED 89.51041 1.851184
48.35 0.000 .6727917
P_EL .2773577 .0526058 5.27 0.000
.0486598 P_GATE .7084009
.0664352 10.66 0.000
.0666584 EMER -.7563048 .1396315
-5.42 0.000 -.032008 DMOB
4.398746 .0817144 53.83 0.000
.349512 PCT_AA -1.096513
.0651923 -16.82 0.000
-.1112841 PCT_AI -1.731408 .1560803
-11.09 0.000 -.0718944 PCT_AS
.5951273 .0585275 10.17 0.000
.0715228 PCT_FI .2598189
.1650952 1.57 0.116
.0099543 PCT_HI .0231088 .0445723
0.52 0.604 .0066676 PCT_PI
-2.745531 .6295791 -4.36 0.000
-.0274142 PCT_MR -.8061266
.1838885 -4.38 0.000
-.0295927 _cons 96.52733 9.305661
10.37 0.000
. ------------------------------------------------
--------------------------------------------------
---------
Parents education
5
Diagnosis and Remedy

• Diagnosis
• Theoretical
• Remedy
• Including new variables

6
Linearity

• Violation of linearity
• An almost perfect relationship will appear as a
  weak one
• Almost all linear relations stop being linear at
  a certain point

7
Diagnosis Remedy

• Diagnosis
• Visual scatter plots
• Comparing regression with continuous and dummied
  independent variable
• Remedy
• Use dummies
• YabXe becomes
• Yab1D1 bk-1Dk-1e where X is broken up into
  k dummies (Di) and k-1 is included. If the
  R-square of this equation is significantly higher
  than the R-square of the original that is a sign
  of non-linearity. The pattern of the slopes (bi)
  will indicate the shape of the non-linearity.
• Transform the variables through a non-linear
  transformation, therefore
• YabXe becomes
• Quadratic Yab1Xb2X2e
• Cubic Yab1Xb2X2b3X3e
• Kth degree polynomial Yab1XbkXke
• Logarithmic Yablog(X)e or
• Exponential log(Y)abXe or Yeabxe
• Inverse Yab/Xe etc.

8
Example
9
Meaningless!
Inflection point -b1/2b2 -(-3.666183)/2.018
1756100.85425 As you approach 100 the negative
effect disappears
10
Additivity

• Yab1X1b2X2e
• The assumption is that both X1 and X2 each,
  separately add to Y regardless of the value of
  the other.
• E.g. Incab1Educationb2Citizenshipe
• Imagine, that the effect of X1 depends on X2.
• If Citizen Incab1Educatione
• If Not Citizen Incab1Educatione
• where b1 gtb1
• You cannot simply add the two. If Citizenship is
  takes only two values, their effect is
  multiplicative
• Incab1Educationb2Citizenshipe
• There are many examples of the violation of
  additivity
• E.g., the effect of previous knowledge (X1) and
  effort (X2) on grades (Y)
• The effect of race and skills on income
  (discrimination)
• The effect of paternal and maternal education on
  academic achievement

11
Diagnosis Remedy

• Diagnosis
• Try other functional forms and compare R-squares
• Remedy
• Introducing the multiplicative term as a new
  variable so
• Yiab1X1b2X2e becomes
• Yiab1X1b2X2b3Z e where ZX1X2
• Or transforming the equation into additive form
• If YaX1b1X2b2e then
• log Ylog(a)b1log(X1)b2log(X2)e so

12
Example with one dummy variable
Model Summary Model R R Square Adjusted R
Square Std. Error of the Estimate 1 .720(a) .519
.519 70.918 a Predictors (Constant), ESCHOOL,
AVG_ED
Does parents education matter more in elementary
school or later?
Coefficients(a) Model Unstandardized
Coefficients Standardized Coefficients t Sig.
B Std. Error Beta 1(Constant) 510.030 2.738
186.250 .000 AVG_ED 87.476 .930 .649 94.08
5 .000 ESCHOOL 54.352 1.424 .264 38.179 .000
a Dependent Variable API13
Model Summary Model R R Square Adjusted R
Square Std. Error of the Estimate 1 .730(a) .533
.533 69.867 a Predictors (Constant), INTESXED,
AVG_ED, ESCHOOL
Coefficients(a) Model Unstandardized
Coefficients Standardized Coefficients t Sig.
B Std. Error Beta 1(Constant) 454.542 4.151
109.497 .000 AVG_ED 107.938 1.481 .801 72.
896 .000 ESCHOOL 145.801 5.386 .707 27.073 .00
0 AVG_EDESCHOOL(interaction) -33.145 1.885 -.49
5 -17.587 .000 a Dependent Variable API13
13
Equations

• Pred(API13i) 454.542 107.938AVG_EDi
  145.801ESCHOOLi(-33.145)AVG_EDiESCHOOLi
• IF ESCHOOL1 i.e. school is an elementary school
• Pred(API13i) 454.542 107.938AVG_EDi
  145.8011(-33.145)AVG_EDi1
• 454.542 107.938AVG_EDi 145.801(-33.145)AVG_ED
  i
• (454.542 145.801) (107.938 -33.145)AVG_EDi
• 600.34374.793AVG_EDi
• IF ESCHOOL0 i.e. school is not an elementary but
  a middle or high school
• Pred(API13i) 454.542 107.938AVG_EDi
  145.8010(-33.145)AVG_EDi0
• 454.542 107.938AVG_EDi
• The effect of parental education is larger after
  elementary school!
• Is this difference statistically significant?

Coefficients(a) Model Unstandardized
Coefficients Standardized Coefficients t Sig.
B Std. Error Beta 1(Constant) 454.542 4.151
109.497 .000 AVG_ED 107.938 1.481 .801 72.
896 .000 ESCHOOL 145.801 5.386 .707 27.073 .00
0 AVG_EDESCHOOL(interaction) -33.145 1.885 -.49
5 -17.587 .000 a Dependent Variable API13
14
Example with continuous variables
15
Proper Level of Measurement
16
Measurement Error

• Take YabXe
• Suppose XXe where X is the real value and e
  is a random measurement error
• Then YabXe ? Yab(Xe)eabXbee ?
• YabXE where Ebee and bb
• The slope (b) will not change but the error will
  increase as a result
• Our R-square will be smaller
• Our standard errors will be larger ? t-values
  smaller ? significance smaller
• Suppose XXcWe where W is a systematic
  measurement error c is a weight
• Then YabXe ? Yab(XcWe)eabXbcWE
  
• bb iff rwx0 or rwy0 otherwise b?b which
  means that the slope will change together with
  the increase in the error. Apart from the
  problems stated above, that means that
• Our slope will be wrong

17
Diagnosis Remedy

• Diagnosis
• Look at the correlation of the measure with other
  measures of the same variable
• Remedy
• Use multiple indicators and structural equation
  models (AMOS)
• Confirmatory factor analysis
• Better measures

18
Normally Distributed Error
19
Non-Normal Error

• Our calculations of statistical significance
  depends on this assumption
• Statistical inference can be robust even when
  error is non-normal
• Diagnosis
• You can look at the distribution of the error.
  Because of the homoscedasticity assumption (see
  later) the error when summed up for each
  prediction should be also normal. (In principle,
  we have multiple observations for each
  prediction.)
• Remember! Our measured variables (Y and X) do not
  have to have a normal distribution! Only the
  error for each prediction.
• Remedy
• Any non-linear transformation will change the
  shape of the distribution of the error

20
Example Count Data
N Minimum Maximum Mean Std. Deviation
childs NUMBER OF CHILDREN 1751 0 8 1.89 1.665
DEPENDENT VARIABLE Underdispersion
Mean/Std.Dev.gt1 Overdispersion
Mean/Std.Dev.lt1 As Mean gtStd. Deviation we have
a case of a (small) underdispersion
21
Poisson and Negative Binomial Regressions
Poisson assumes MeanStd.Dev (No over- or
underdispersion) Negative Binomial does not make
this assumption
Log of expected counts is now the unit of the
dependent variable
22
Error Has a Non-Zero Mean

• The solid line gives a negative
• The dotted line a positive mean
• This can happen when we have some selection
  problem
• Diagnosis
• Visual scatter plot will not help unless we know
  in advance somehow the true regression line
• Remedy
• If it is a selection problem try to address it.

23
Non-independent errors

• Example 1 Suppose you take a survey of 10 people
  but you interview everyone 10 times.
• Now your N1000 but your errors are not
  independent. For the same person you will have
  similar errors
• Example 2 Suppose you take 10 countries and you
  observe them in 10 different time period
• Now your N1000 but your errors are not
  independent. For the same country you will have
  similar errors
• Example 3 Suppose you take 100 countries and you
  observe them only once. Now your N100. But
  countries that are next to each other are often
  similar (same geography and climate, similar
  history, cooperation etc.). If your model
  underpredicts Denmark, it is likely to
  underpredict Sweden as well.
• Example 4 Suppose you take 100 people but they
  are all couples, so what you really have is 50
  couples. Husband and wife tend to be similar. If
  your model underestimates one chances are it does
  the same for the other. Spouses have similar
  errors.
• Statistical inference assumes that each case is
  independent of the other and in the two examples
  above it is not the case. In fact, your N lt 100.
• This biases your standard error because the
  formula is tricked into believing that you have
  a larger sample than you actually have and larger
  samples give smaller standard errors and better
  statistical significance.
• This may also bias your estimates of the
  intercept and the slope. Non-linearity is a
  special case of correlated errors.

24
Diagnosis Remedy

• It is called autocorrelation because the
  correlation is between cases and not variables,
  although autocorrelations often can be traced to
  certain variables such as common geographic
  location or same country or person or family.
• Diagnosis
• Visual, scatterplot
• Checking groups of cases that are theoretically
  suspect
• Certain forms of serial or spatial
  autocorrelations can be diagnosed by calculating
  certain statistics (e.g., Durbin-Watson test)
• Remedy
• You can include new variables in the equation
• E.g. for serial (temporal) correlation you can
  include the value of Y in t-1 as an independent
  variable
• For spatial correlation we can often model the
  relationships by introducing an weight matrix

25
Heteroscedasticity

• Homoscedasticity means equal variance
• Heteroscedasticity means unequal variance
• We assume that each prediction is not just on
  target on average but also that we make the same
  amount of error
• Heteroscedasticity results in biased standard
  errors and statistical significance
• Diagnosis
• Visual, scatter plot
• Remedy
• Introducing a weight matrix (e.g. using 1/X)

26
Predictor Related to Error

• Error represents all factors influencing Y that
  are not included in the regression equation
• If an omitted variable is related to X the
  assumption is violated. This is the same as the
  Completeness or Omitted Variable Problem
• Diagnosis
• The error will ALWAYS be uncorrelated with X,
  there is no way to establish the TRUE error
• Theoretical
• Remedy
• Adding new variables to the model

27
Correlated errors across interrelated equations

• We sometimes estimate more than one regression.
• Suppose Ytab1Xt-1b2Zt-1e but
• Xtab1Yt-1b2Zt-1e
• e and e will be correlated
• (whatever is omitted from both equations will
  show up in both e and e making them correlated)
• This is also the case in sample selection models
• Sab1Xb2Ze S is whether one is selected into
  the sample
• Yab1Xb2Zb3Wb4Ve Y is the outcome of
  interest
• e and e will be correlated
• (whatever is omitted from both equations will
  show up in both e and e making them correlated)