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12 views

regression-analysis-notes

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minaskar
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Introduction to Regression

Analysis
Overview
Regression analysis is a statistical method used to model the relationship between a dependent variable (outcome) and
one or more independent variables (predictors). It's one of the most widely used statistical techniques in research,
business, and data science.

Types of Regression
1. Simple Linear Regression
Models relationship between one independent and one dependent variable
Form: Y = β₀ + β₁X + ε
Y: Dependent variable
X: Independent variable
β₀: Y-intercept
β₁: Slope coefficient
ε: Error term

2. Multiple Linear Regression


Extends simple linear regression to multiple independent variables
Form: Y = β₀ + β₁X₁ + β₂X₂ + ... + βₖXₖ + ε
Allows for controlling multiple factors simultaneously

3. Other Common Types


Polynomial Regression: Y = β₀ + β₁X + β₂X² + ... + βₖXᵏ + ε
Logistic Regression: For binary outcomes
Ridge Regression: Includes L2 regularization
Lasso Regression: Includes L1 regularization

Key Concepts
1. Least Squares Method
Minimizes sum of squared residuals
Formula: min Σ(Yᵢ - Ŷᵢ)²
Produces Best Linear Unbiased Estimator (BLUE)

2. Model Assumptions
a. Linearity

Relationship between X and Y is linear


Can be checked with scatterplots

b. Independence

Observations are independent


No autocorrelation

c. Homoscedasticity

Constant variance of residuals


Check with residual plots

d. Normality

Residuals are normally distributed


Use Q-Q plots for verification

3. Model Evaluation Metrics


R-squared (R²)

Measures proportion of variance explained


Range: 0 to 1
Formula: R² = 1 - (SSres/SStot)

Adjusted R-squared

Adjusts for number of predictors


Penalizes unnecessary complexity
Formula: R²adj = 1 - [(1-R²)(n-1)/(n-k-1)]

Standard Error of Regression (S)

Average distance observations fall from regression line


In original units of dependent variable

Detailed Example: House Price Prediction


Problem Statement
Predict house prices using square footage and number of bedrooms.

Data

Price($) Sq.Ft Bedrooms


250,000 1,500 3
300,000 1,800 3
350,000 2,000 4
280,000 1,600 3
400,000 2,200 4

Analysis Steps
1. Model Specification Y = β₀ + β₁X₁ + β₂X₂ + ε Where:

Y: House price
X₁: Square footage
X₂: Number of bedrooms

2. Parameter Estimation Using statistical software:

β₀ = -50,000
β₁ = 150
β₂ = 25,000

3. Final Equation Price = -50,000 + 150(Sq.Ft) + 25,000(Bedrooms)

4. Interpretation

Each additional square foot → $150 increase


Each additional bedroom → $25,000 increase
R² = 0.85 (85% variance explained)

Diagnostic Tools
1. Residual Plots
Plot residuals vs. fitted values
Check for patterns
Identify heteroscedasticity

2. Leverage Points
Hat matrix diagonal elements
High leverage if > 2(p+1)/n
Influence potential model fit

3. Cook's Distance
Measures observation influence
Combines leverage and residual size
Flag if > 4/(n-k-1)

4. VIF (Variance Inflation Factor)


Measures multicollinearity
VIF = 1/(1-R²ᵢ)
Concern if VIF > 5 or 10

Common Applications
1. Economics/Finance

Stock price prediction


Economic forecasting
Risk analysis

2. Marketing

Sales prediction
Customer behavior
Advertisement effectiveness

3. Scientific Research

Experimental analysis
Environmental studies
Medical research

Practice Problems
1. A dataset contains information about employee salaries (Y), years of experience (X₁), and education level (X₂).
The regression equation is: Salary = 30,000 + 2,000(Experience) + 5,000(Education) Interpret the coefficients.

2. Given R² = 0.75 for a model with n = 100 observations and k = 3 predictors, calculate the adjusted R².

Model Building Strategy


1. Variable Selection

Forward selection
Backward elimination
Stepwise regression
Theoretical considerations

2. Model Validation

Training/test split
Cross-validation
Bootstrap methods

3. Model Refinement

Variable transformation
Interaction terms
Polynomial terms

Solutions to Practice Problems


1. Salary Problem

Base salary: $30,000


Each year of experience adds $2,000
Each education level adds $5,000
Linear relationship assumed

2. Adjusted R² Problem

R²adj = 1 - [(1-0.75)(100-1)/(100-3-1)]
= 1 - [0.25 × 99/96]
≈ 0.74

Additional Resources
Statistical software packages (R, Python, SAS)
Online regression calculators
Textbooks and online courses
Interactive visualization tools

Common Pitfalls
1. Extrapolation beyond data range
2. Ignoring model assumptions
3. Overfitting with too many predictors
4. Misinterpreting correlation as causation
5. Not addressing multicollinearity

Advanced Topics
1. Time Series Regression

Autocorrelation
Seasonal effects
ARIMA models

2. Nonlinear Regression

Exponential relationships
Power relationships
Logarithmic transformations

3. Mixed Effects Models

Random effects
Hierarchical data
Repeated measures

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