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Regression Analysis
Gordon Stringer
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Regression Analysis
Regression Analysis: the study of the
relationship between variables

Regression Analysis: one of the most
commonly used tools for business analysis

Easy to use and applies to many situations
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Regression Analysis
Simple Regression: single explanatory
variable

Multiple Regression: includes any number
of explanatory variables.
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Regression Analysis
Dependant variable: the single variable
being explained/ predicted by the regression
model (response variable)

Independent variable: The explanatory
variable(s) used to predict the dependant
variable. (predictor variable)

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Regression Analysis
Linear Regression: straight-line relationship
Form: y=mx+b

Non-linear: implies curved relationships, for
example logarithmic relationships

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Data Types
Cross Sectional: data gathered from the
same time period

Time Series: Involves data observed over
equally spaced points in time.
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Graphing Relationships
Highlight your data, use chart wizard,
choose XY (Scatter) to make a scatter plot


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Scatter Plot and Trend line
Click on a data point and add a trend line


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Scatter Plot and Trend line
Now you can see if there is a relationship
between the variables. TREND uses the
least squares method.


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Correlation
CORREL will calculate the correlation
between the variables
=CORREL(array x, array y)

or
Tools>Data Analysis>Correlation


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Correlation


Correlation describes the strength of a linear
relationship
It is described as between 1 and +1
-1 strongest negative
+1 strongest positive
0= no apparent relationship exists
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Simple Regression Model
Best fit using least squares method
Can use to explain or forecast
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Simple Regression Model
y = a + bx + e (Note: y = mx + b)
Coefficients: a and b
Variable a is the y intercept
Variable b is the slope of the line


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Simple Regression Model
Precision: accepted measure of accuracy is
mean squared error
Average squared difference of actual and
forecast



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Simple Regression Model
Average squared difference of actual and
forecast
Squaring makes difference positive, and
severity of large errors is emphasized



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Simple Regression Model
Error (residual) is difference of actual data
point and the forecasted value of dependant
variable y given the explanatory variable x.


Error
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Simple Regression Model
Run the regression tool.
Tools>Data Analysis>Regression


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Simple Regression Model
Enter the variable data


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Simple Regression Model
Enter the variable data
y is dependent, x is independent


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Simple Regression Model
Check labels, if including column labels
Check Residuals, Confidence levels to
displayed them in the output


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Simple Regression Model
The SUMMARY OUTPUT is displayed
below


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Simple Regression Model
Multiple R is the correlation coefficient
=CORREL


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Simple Regression Model
R Square: Coefficient of Determination

=RSQ
Goodness of fit, or percentage of variation
explained by the model


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Simple Regression Model
Adjusted R Square =
1- (Standard Error of Estimate)
2
/(Standard Dev Y)
2

Adjusts R Square downward to account for the number of
independent variables used in the model.



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Simple Regression Model
Standard Error of the Estimate
Defines the uncertainty in estimating y with
the regression model
=STEYX


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Simple Regression Model
Coefficients:
Slope
Standard Error
t-Stat, P-value


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Simple Regression Model
Coefficients:
Slope = 63.11
Standard Error = 15.94
t-Stat = 63.11/15.94 = 3.96; P-value = .0005


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Simple Regression Model
y = mx + b

Y= a + bX + e
= 56,104 + 63.11(Sq ft) + e

If X = 2,500 Square feet, then

$213,879 = 56,104 + 63.11(2,500)
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Simple Regression Model
Linearity
Independence
Homoscedasity
Normality


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Simple Regression Model
Linearity


Square Feet Line Fit Plot
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
1,500 2,000 2,500 3,000 3,500 4,000
Square Feet
C
o
s
t
Cost Predicted Cost
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Simple Regression Model
Linearity


Square Feet Residual Plot
-100000
-50000
0
50000
100000
1,500 2,000 2,500 3,000 3,500 4,000
Square Feet
R
e
s
i
d
u
a
l
s
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Simple Regression Model
Independence:
Errors must not correlate
Trials must be independent


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Simple Regression Model
Homoscedasticity:
Constant variance
Scatter of errors does not change from trial to
trial
Leads to misspecification of the uncertainty in
the model, specifically with a forecast
Possible to underestimate the uncertainty
Try square root, logarithm, or reciprocal of y


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Simple Regression Model
Normality:
Errors should be normally distributed
Plot histogram of residuals

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Multiple Regression Model
Y = +
1
X
1
+ +
k
X
k
+

Bendrix Case

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Regression Modeling Philosophy
Nature of the relationships
Model Building Procedure
Determine dependent variable (y)
Determine potential independent variable (x)
Collect relevant data
Hypothesize the model form
Fitting the model
Diagnostic check: test for significance