3.

Confidence interval, model fitness and prediction

3.1. Confidence interval

• Based on the sampling distribution of b0 and b1 (t-distribution), one can construct the
interval estimates
• A 100(1 – α)% confidence interval for b1
s2
b1 ± tα / 2,n − 2
S XX
• A 100(1 – α)% confidence interval for b0
1 x2
b0 ± tα / 2,n − 2 s +
n S XX

Example

Westwood company data

• 95% CI for b0 and b1
o t0.025,8 = 2.306
• A 95% CI for b1
o b1 = 2
o SE(b1) = 0.047
o CI = 2 ± 2.306 × 0.047 = (1.892 , 2.108)
o Exclude zero
• A 95% CI for b0
o b0 = 10
o SE(b0) = 2.5
o CI = 10 ± 2.306 × 2.5 = (4.228 , 15.772)
o Exclude zero

Example

CEO data
• 90% CI for b0 and b1
o t0.05,57 = 1.672
• 90% CI for b0
o b0 = 242.70
o SE(b0) = 168.76
o 242.70 ± 1.672 × 168.76 = (-39.47, 524.87)
o Include zero
• 90% CI for b1
o b1 = 3.1327
o SE(b1) = 3.22
o 3.1327 ± 1.672 × 3.22 = (-2.26, 8.53)
o Include zero

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3.2. Quality of fitted model
• Does the data fit the model adequately?
• Will the model predict the response well enough?

(a) Coefficient of determination

• Proportion of variation in the response data that is explained by the model
SSR SSE
R2 = = 1−
SST SST
• Properties
o 0 ≤ R2 ≤ 1
o R2=1
ƒ Perfect fit of the model
ƒ 100% of the variation of Y can be explained by X
ƒ SSR + 0 = SST or SSE = 0
ƒ All the data points lie on the regression line
o R2 = 0
ƒ 0 + SSE = SST or SSE = SST
ƒ There is no linear relationship between X and Y
ƒ But it may still possible to have a strong nonlinear relationship between them
o R2 increases with number of regressors (→ outfitting)

• R2 and correlation
o For simple linear regression (with only one regressor), the coefficient of determination is
just equal to the square of the correlation coefficient between X and Y.
o Since
S
SSR = b12 S XX (exercise), b1 = XY , SST = SYY
S XX
o Therefore
2
b2S S 2 S XX ⎛⎜ S XY ⎞
⎟ = r2
R = 1 XX = XY
2
=
SYY 2
S XX SYY ⎜⎝ S XX SYY ⎟
⎠

2
Example

Westwood company data

• Coefficient of determination
SSR 13600
o R2 = = = 0.996
SST 13660
o Close to 1
o The linear regression model explains 99.6% of the variance of Y
o The model fits the data very well

Example

Shock data
• When all cases are considered
o R2 = 127.74 / 199.06 = 0.6417
o The linear regression model explains 64.17% of the variance of Y
o The model fits the data fairly well
• When obs. 3 and 14 are removed
o R2 = 101.35 / 125.33 = 0.8086
o The linear regression model explains 80.86% of the variance of Y
o The model fits the reduced data much better

Example

CEO data
• R2 = 45896/2820832 = 0.0163
o The linear regression model explains only 1.63% of the variance of Y
o The model does not fit the data well

3.3. Prediction
(a) Mean response
• Mean of Y given X = x0
E(Y | X = x0) = E( β0 + β 1 X + ε | X = x0) = β0 + β1 x0
• Estimated mean response
yˆ = b0 + b1 x0
• Standard error for mean response given X = x0
Var ( yˆ ) = Var (b 0 +b1 x0 )
= Var ( y + b1 (x0 − x )) Q b0 = y − b1 x
= Var ( y ) + Var (b1 ( x0 − x )) Q Cov( y , b1 ) = 0
⎛ 1 (x − x )2 ⎞
= σ 2 ⎜⎜ + 0 ⎟
⎝n S XX ⎟⎠
o Substitute s2 for σ2, standard error of estimated mean response
1 ( x0 − x )
2
s{yˆ } = s +
n S XX

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 • Confidence interval for mean response
o Under the condition of normal errors,
ƒ ŷ is normal since it is a linear combination of yi
ƒ s2 is σ 2 χ n2− 2 independent of ŷ
o A 100(1 – α)% confidence interval for mean response
1 (x0 − x )
2
yˆ ± tα / 2,n − 2 s +
n S XX

Example

Westwood company data

• Predict the mean response at lot size = 55 and 70
o yˆ (55) = 10 + 2 × 55 = 120
o yˆ (70) = 10 + 2 × 70 = 150
• SE for mean response
⎛ 1 (55 − 50 )2 ⎞
o SE ( y (55)) = 7.5⎜⎜ +
ˆ ⎟ = 0.8973
⎟
⎝ 10 3400 ⎠
⎛ 1 (70 − 50 )2 ⎞
o SE ( yˆ (70 )) = 7.5⎜⎜ + ⎟ = 1.2776
⎟
⎝ 10 3400 ⎠
• t0.025,8 = 2.306
• A 95% CI for mean response at lot size = 55
o 120 ± 2.306 × 0.8973 = (117.93,122.07 )
• A 95% CI for mean response at lot size = 70
o 150 ± 2.306 ×1.2776 = (147.05,152.95)
• Width of the CI increases with the distance from x0 to x
180

160

140

120

100

80

60

40
20 40 60 80

Example

Shock data
• 90% CI for the mean responses at number of shocks = 0, 8 and 15
• t0.05,14 = 1.761
x0 yˆ (x0 ) SE[ yˆ (x0 )] 90% CI
0 10.48 1.0776 8.58 12.38
8 6.19 0.5676 4.58 6.58
15 1.29 1.0776 -0.61 3.19
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• SE is symmetric
o SE[ yˆ (0)] = SE[ yˆ (15)]
• The confidence band does not include 90% of the observations. Why?

Example

CEO data
• 95% CI for the mean responses at number of shocks = 32, 55 and 74
• t0.025,57 = 2.002
x0 yˆ (x0 ) SE[ yˆ ( x0 )] 95% CI
32 342.949 69.287 204.204 481.694
55 415.001 30.815 353.294 476.708
74 474.523 77.944 318.442 630.603
• The confidence intervals are very width on both ends away from the center of the data

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(b) Individual response
• Predicted individual value of Y given X = x0
Y | X = x0 = β 0 + β1 x0 + ε
• Estimated individual response
yˆ = b0 + b1 x0
• Prediction interval for individual response
o Consider a single observation at X = x0 denoted by y0 ( = β 0 + β1 x0 + ε ) which is
independent of ŷ
o Expected value of ŷ equals to expected value of y0
E ( y0 − yˆ ) = E (β 0 + β1 x0 + ε − (b0 + b1 x0 ))
= β 0 + β1 x0 − E (b0 ) − E (b1 )x0 = 0
o Variance of the difference between the observation and the prediction given X = x0
Var ( y0 − yˆ ) = Var ( y0 ) + Var ( yˆ )
⎛ 1 (x − x )2 ⎞
= σ 2 + σ 2 ⎜⎜ + 0 ⎟
⎟
⎝ n S XX ⎠
⎛ 1 ( x − x )2 ⎞
= σ 2 ⎜⎜1 + + 0 ⎟
⎝ n S XX ⎟⎠
o Under normal assumption, since y0 and ŷ are normally distributed,
y0 − yˆ
~ N (0,1)
1 ( x0 − x )
2
σ 1+ +
n S XX
o s2 ~ σ 2 χ n2− 2 and is independent of y0 − yˆ
ƒ Replace σ by s
y0 − yˆ
~ tn−2
1 (x − x )
2
s 1+ + 0
n S XX
ƒ Prediction interval (CI for individual response)
1 (x0 − x )
2
yˆ ± tα / 2,n −2 s 1 + +
n S XX

Example

Westwood company data

• Predicted individual response = predicted mean response = ŷ
• t0.025,8 = 2.306
• SE for individual prediction at X = 55 and 70
⎛ 1 (55 − 50 ) ⎞
2
o SE ( yˆ (55)) = 7.5⎜⎜1 + + ⎟ = 2.8819
⎝ 10 3400 ⎟⎠

⎛ 1 (70 − 50 ) ⎞
2
o SE ( yˆ (70 )) = 7.5⎜⎜1 + + ⎟ = 3.0220
⎝ 10 3400 ⎟⎠
• A 95% CI for individual prediction at lot size = 55
o 120 ± 2.306 × 2.8819 = (113.35,126.65)

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• A 95% CI for individual prediction at lot size = 70
o 150 ± 2.306 × 3.0220 = (143.03,156.97 )
• Prediction interval (blue lines) is wider than mean response interval (red lines)
180

160

140

120

100

80

60

40
20 40 60 80

Example

Shock data
• 90% CI for the individual prediction at number of shocks = 0, 8 and 15
• t0.05,14 = 1.761

x0 yˆ (x0 ) SE[ yˆ ( x0 )] 90% CI

0 10.48 2.5011 6.0793 14.8898
8 6.19 2.3273 1.4819 9.6802
15 1.29 2.5011 -3.1148 5.6957

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Example

CEO data

• 95% CI

• Extend the prediction to X = 0

o The confidence interval for prediction which is far away from the mean of the data becomes
very wide
o The interval for the mean response (so as the individual prediction) include 0