Example 1

A linear relation between and

= + ⋯+ +⋯+

 = or ∆ = ∆
 The slope of the relation between and
 The marginal or partial effect of on
 AEBE, i.e., holding constant all other factors that affect (i.e., and ),
 a one unit ↑ in is associated with units of ∆ in

e.g., = + + +⋯+

= Suppose = 12, a one dollar ↑ in NI increases MVE by 12 dollars

Doron Israeli Multiple linear regression analysis 1

 Example 2
Quadratic terms
= + ⋯+ + ⋯+ +⋯+

 = +2
 and determine the slope of the relation between and
 AEBE, represents the linear effect of on
 the immediate ∆ in for a one-unit ∆ in (from 0)
 AEBE, captures the ∆ in the effect of on for a one-unit ∆ in (from k)
 the ∆ in the relation between and as changes
e.g., = + + + + ⋯+

= +2 Suppose = 10 and = −0.5

Initially, ↑ training ↑ performance. The negative squared term indicates that after a
certain
Doron Israeli point, ↑ training leads to a ↓ Multiple
in performance (i.e., fatigue, overtraining).
linear regression analysis 2
 Example 2 (Cont’d)

> <
>

<

> & < or < & > (parabolic shape):

there is a value of for which the effect of on is 0
(aka the turning point, e.g., = ∗ ).
Formally, +2 ∗ = 0, and ∗ = − .

E.g., for > 0 and < 0, there is a positive value

of where the effect of on is 0;
before this point, has a positive effect on ;
after this point, has a negative effect on .
It might be important to know where the turning point is.
Module 1A
Doron Israeli Multiple linear regression analysis 3
 Example 3
Interactions terms
= + ⋯+ + ⋯+ + ⋯+ +⋯+
 = +
 and determine the slope of the relation between and
 = +
 and determine the slope of the relation between and .

e.g., = + + + × +⋯+

= + = + Module 1B

Suppose = 30, = 500, = 5, = 100, =3

AEBE, for an average, 3-BDRMS 100-SQRM apt, a 1 unit ↑ in SQRM ↑ the PRICE by
Doron + 5*3 = 45, a 1 unit ↑ in BDRMSMultiple
30 Israeli ↑ the price
linear by
regression 500 + 5*100 = 1,000.
analysis 4
 Example 4: Logarithmic terms
Log-Level model
log( ) = + ⋯ + + ⋯+
( )
 = , i.e., is the slope of the relation between log( ) and .
 AEBE, a one unit ↑ in is associated with
 (1) units of ∆ in log( ), or
 (2) approximately 100% ∆ in , or
∆
( ) / × %
 = × = = or ≈ 100%, or
∆
 (3) exactly exp( 1) − 1 100% ∆ in .
 for a one unit ↑ in , e.g., from to + 1,
 log = + ⋯+ + 1 + = log + 1
 exponentiating both sides, = × exp( 1)
 = or − 1 × 100% = [exp( 1) − 1] × 100%
Doron Israeli Multiple linear regression analysis 5
 Example 4: Logarithmic terms (Cont’d)

Log-Level model (Cont’d)

log( ) = + ⋯ + + ⋯+

e.g., = + + ⋯+

( )
= Suppose = 0.05

AEBE, a one unit (e.g., $1,000) increase in adv expenditure is associated with
0.05 increase in log(SALES)
an approximate 5% increase in sales, or
an exact exp 0.05 1 − 1 × 100% = 5.13% increase in sales.

Doron Israeli Multiple linear regression analysis 6

 Example 4: Logarithmic terms (Cont’d)

Level-Log model
= + ⋯ + log( ) + ⋯ +

 ( )
= , i.e., is the slope of the relation between and log( )
 AEBE, a one
 (1) unit ↑ in log( ) is associated with units of ∆ in , or
 (2) % ↑ in is associated with approximately /100 units of ∆ in .
 = =
 /
=
∆
 ∆
× ≈ × , i.e., the ∆ in for a 1% ↑ in

Doron Israeli Multiple linear regression analysis 7

 Example 4: Logarithmic terms (Cont’d)

Level-Log model (Cont’d)

= + ⋯ + log( ) + ⋯ +

e.g., = + log + + + ⋯+ ⋯+

= Suppose = 1.2
( )

AEBE, a one
unit ↑ in log of leverage is associated with 1.2 units ↑ in WACC (because WACC is in
%, this means a 1.2 percentage point ↑), or
% ↑ in leverage is associated with approximately 1.2/100 = 0.012 units ↑ in WACC.

Doron Israeli Multiple linear regression analysis 8

 Example 4: Logarithmic terms (Cont’d)

Log-Log model
log( ) = + ⋯ + log( ) + ⋯ +
( )
 = , i.e., is the slope of the relation between log( ) and log( ).
( )
 AEBE, a one
 (1) unit ↑ in log( ) is associated with units of ∆ in log( ), or
 (2) % ↑ in is associated with approximately % of ∆ in .
( )
 =

 × =
/
 /
=
∆
 ∆
≈
Doron Israeli Multiple linear regression analysis 9
 Example 4: Logarithmic terms (Cont’d)

Log-Log model (Cont’d)

log( ) = + ⋯ + log( ) + ⋯ +

e.g., ( )= + log + + ⋯+⋯+

( )
= Suppose = 0.5
( )

AEBE, a one
unit ↑ in log of investment in education is associated with 0.5 units ↑ in GDP, or
% ↑ in investment in education is associated with approximately 0.5% ↑ in GDP.

Doron Israeli Multiple linear regression analysis 10

 Example 4: Logarithmic terms (Cont’d)

Concepts of constant or varying

∆ ∆ / ∆ / Module 1C
marginal effect, ∆ , rate of return, , elasticity, .
∆ ∆ /
“Level-Level”

“Level-Log”
“Log-Level”

Relation between and : Relation between and ( ): Relation between ( ) and :

(1) constant marginal effect,
(2) varying elasticity.
Prof. Doron Israeli
(1) constant marginal effect. (1) constant marginal effect.
Relation between and : Relation between and :
(1) increasing marginal effect, (1) diminishing marginal effect,
(2) constant rate of return.
Multiple linear regression analysis
(2) constant effect for % 11∆ in .