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Lecture Note 3

Quantile regression (QR) extends classical regression by analyzing the conditional distribution of a variable Y across different quantiles, rather than just focusing on the mean. Developed by Koenker and Bassett in 1978, QR allows for a more comprehensive understanding of relationships between Y and other variables X by utilizing optimization techniques for estimating conditional quantile functions. The quantile function serves as the inverse of the cumulative distribution function, providing insights into the distribution of data values at specified probabilities.

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Lecture Note 3

Quantile regression (QR) extends classical regression by analyzing the conditional distribution of a variable Y across different quantiles, rather than just focusing on the mean. Developed by Koenker and Bassett in 1978, QR allows for a more comprehensive understanding of relationships between Y and other variables X by utilizing optimization techniques for estimating conditional quantile functions. The quantile function serves as the inverse of the cumulative distribution function, providing insights into the distribution of data values at specified probabilities.

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QUANTILE REGRESSION-III

Dr. Muhammad Shahadat Hossain Siddiquee


Professor, Department of Economics
University of Dhaka
Email: [email protected]
Cell: +8801719397749
Starting Points of QR: Theoretical Background
• Classical regression focuses on the expectation (mean) of the variable Y,
E(Y|X), given a collection of variables X.
• It only provides information about a specific region of the conditional
distribution of Y.
• Quantile regression (QR) extends this approach by allowing the study of the
conditional distribution of Y on X at different locations, providing a global
view of the relationship between Y and X.
• To illustrate this point, QR can be compared to classical regression in the
same way that quantiles describe the location of a distribution compared to
the mean.
• QR was first developed by Koenker and Bassett (1978), who extended the
ordinary least squares (OLS) estimate of the conditional mean models to
conditional quantile functions.
• QR function takes a probability value (p, where 0 ≤ p ≤ 1) as input and
returns the value of the random variable below which that probability lies.
For example, if Q(0.75) = 60, it means that 75% of the data values are below 60.
Theoretical Background: QR…
• The estimation of conditional quantile functions can be formulated as an
optimization problem, which allows QR to utilize mathematical techniques
commonly used for the conditional mean function.
• Compare mean and quantiles while considering their objective functions.
• Assuming Y is a generalized random variable (i.e., A generalized random
variable, or variate, extends the concept of a random variable by allowing for a
broader range of probabilistic experiments and outcomes, without being tied
to a specific type of experiment), the mean is determined as the point c in the
distribution where the squared sum of deviations is minimized, which
corresponds to the solution of the following minimization problem (Davino et
al., 2013):

• In mathematics, the arguments of the minima (abbreviated arg min or argmin)


is the input points at which a function output value is minimized.
Theoretical Background: QR…
• The median, instead, minimizes the absolute sum of deviations. In
terms of a minimization problem, the median is thus:

• We can get the sample estimators 𝜇̂ and 𝑀𝑒̂ for such centers using the
sample observations.
• It is common knowledge that the univariate quantiles are identified by
specific points in the distribution. For example, the 𝜃th quantile is the
value of y for which 𝑃(𝑌 ≤ 𝑦) = 𝜃.
• Taking the cumulative distribution function (CDF) as a starting point:
Theoretical Background: QR…
• The quantile function is defined as Inverse of Cumulative Distribution
Function (CDF) such as:

For θ ∈ [0, 1]. Where, “inf” stands for infimum, which is the greatest lower
bound of a set or function. If F(.) is strictly increasing and continuous, then
is the unique real number y such that F(y) = θ (Gilchrist, 2000: 13).
• The CDF, F(y), gives the probability that a random variable Y is less than or
equal to y.
• The quantile function, Q(p), finds the value y such that F(y) = p.

• It is explained in our first lecture that the quantile function is also known
as the percentile function, percent-point function, or inverse cumulative
distribution function.
Theoretical Background: QR…
• Less frequently, quantiles are shown as specific distributional centers,
minimizing the weighted absolute sum of deviations (Hao and
Naiman, 2007). In such a view the 𝜃-th quantile is thus:

Where denotes the following loss function (Davino, et al., 2013).

• It follows that this loss function is an asymmetric absolute loss


function, which is a weighted sum of absolute deviations with (1 − θ)
weight applied to the negative deviations and (θ) weight applied to
the positive deviations.
Theoretical Background: QR…
• In the case of a discrete variable Y with probability distribution 𝑓(𝑦) =
𝑃(Y = 𝑦), the previous minimization problem becomes:

• The same criterion is adopted in the case of a continuous random


variable substituting summation with integrals:
Theoretical Background: QR…
• Where 𝑓(𝑦) denotes the probability density function of Y.
• The sample estimator 𝑞 for θ ∈ [0, 1] is likewise obtained using the
sample information in the previous formula.
• Finally, it is straightforward to say that for θ = 0.5 we obtain the
median solution.

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