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Lecture 10

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Lecture 10

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vanshika.agarwal.2022
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© © All Rights Reserved
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Lecture 10:

Classical Linear Regression Model (CLRM)

History of Regression:

- The term regression was introduced by Francis Galton.


- Galton found that, there was a tendency for tall parents to have tall children and
for short parents to have short children, the average height of children born of
parents of a given height tended to move or “regress” toward the average height
in the population as a whole.
- Galton’s law of universal regression was confirmed by his friend Karl Pearson,
who collected more than a thousand records of heights of members of family
groups.
In case you want to read more history, kindly go to the following link:
https://amstat.tandfonline.com/doi/full/10.1080/10691898.2001.11910537#.Wz3e1NIzbIU

THE MODERN INTERPRETATION OF REGRESSION:

- Regression analysis is concerned with the study of the dependence of one


variable, the dependent variable, on one or more other variables, the explanatory
variables, with a view to estimating and/or predicting the (population) mean or
average value of the former in terms of the known or fixed (in repeated sampling)
values of the latter.

STATISTICAL VERSUS DETERMINISTIC RELATIONSHIPS

- regression analysis is concerned as the statistical, in statistical relationships


among variables we essentially deal with random or stochastic variables, that is,
variables that have probability distributions.
- In functional or deterministic dependency, on the other hand, we also deal with
variables, but these variables are not random or stochastic. Eg, Newton’s law of
gravity, etc.
TERMINOLOGY AND NOTATION

TWO VARIABLE REGRESSION ANALYSIS

- In regression analysis there is an asymmetry in the way the dependent and


explanatory variables are treated. The dependent variable is assumed to be
statistical, random, or stochastic, that is, to have a probability distribution. The
explanatory variables, on the other hand, are assumed to have fixed values (in
repeated sampling).

- Let us consider an example of 60 families:


- a total population of 60 families in a hypothetical community and their weekly
income (X) and weekly consumption expenditure (Y)
- The 60 families are divided into 10 income groups (from $80 to $260)
- The mean values are called conditional expected values, as they depend on the
given values of the (conditioning) variable X. Symbolically, we denote them as
E(Y | X), which is read as the expected value of Y given the value of X.
- joining these conditional mean values, we obtain what is known as the
population regression line (PRL), or more generally, the population
regression curve. More simply, it is the regression of Y on X.
- Geometrically, then, a population regression curve is simply the locus of the
conditional means of the dependent variable for the fixed values of the
explanatory variables

THE CONCEPT OF POPULATION REGRESSION FUNCTION (PRF)

- it is clear that each conditional mean E(Y | Xi) is a function of Xi, where Xi is a
given value of X.
- Therefore, E(Y | Xi) = f(Xi)
- we may assume that the PRF E(Y | Xi) is a linear function of X
E(Y | Xi) = β1 + β2Xi
- β1 and β2 are unknown but fixed parameters known as the regression coefficients

THE MEANING OF THE TERM LINEAR


- Linearity in the Variables
- Linearity in the Parameters

STOCHASTIC SPECIFICATION OF PRF


- Can we say anything about the relationship between an individual family’s
consumption expenditure and a given level of income?
- given the income level of Xi, an individual family’s consumption expenditure is
clustered around the average consumption of all families at that Xi, that is,
around its conditional expectation
- Therefore, we can express the deviation of an individual Yi around its expected
value as follows:
ui = Yi − E(Y | Xi)
Yi = E(Y | Xi) + ui

- where the deviation ui is an unobservable random variable taking positive or


negative values. Technically, ui is known as the stochastic disturbance or
stochastic error term.

Yi = E(Y | Xi) + ui
Yi = β1 + β2Xi + ui

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