ECONOMETRICS AND FORECASTING FOR BUSINESS – ECO627

MULTIPLE LINEAR REGRESSION MODEL (MLRM) MATERIALS

PREPARED BY
FATMA ABDEL-RAOUF

Multiple Regression Example 1 (Demand for Chicken):

Using the “D70 for Chicken Data” file posted on Campus Web, run a regression of the per capita
consumption of chicken on the price of chicken, the price of beef, and the per capita disposable income,
and then answer the following questions:
a. Write down the estimated equation.
b. What does each estimated coefficient mean?
c. Compare the estimated coefficient of the price of chicken in this model with your
estimated coefficient in the SLM regression example 2.
d. Compare 𝑅 2 of this model to the 𝑅 2 you obtained in the SLM regression example 2 and
explain why they are different.
e. Compare 𝑅 2 and 𝑅̅ 2 for your model and explain why they are different.
f. Using the F-test, test the significance of the model: Are all your explanatory variables
significant?
g. Using the t-test, test the hypothesis that each of your individual estimated coefficients is
significant.
h. Using the F-test, test the joint hypothesis that the price of beef and the per capita
disposable income are jointly significant.
i. Run the following three regressions:

- Per capita chicken consumption on the price of chicken.

- Per capita chicken consumption on the price of chicken and the price of beef.
- Per capita chicken consumption on the price of chicken, the price of beef, and the per
capita disposable income.

Present the results of these several multiple regressions the proper way, comment on the
significance of each individual estimated coefficient, and comment on the measures of
goodness-of-fit for all models.

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Presenting Several Multiple Regression Results:
Regression of per capita consumption of chicken on the price of chicken, the price of beef, and the per
capita disposable income:

Dependent variable: Per capita chicken consumption (in pounds)

Regressors (Indep variables) (1) (2) (3)

Price of chicken -3.22** -2.66** -0.57**
(1.03) (0.59) (0.15)

Price of Beef 0.86** 0.03

(0.11) (0.04)

Per capita disposable income 0.25**

(0.01)

Intercept 91.28** 38.47** 30.08**

(11.08) (9.39) (1.999)

Summary Statistics
SER 15.18 8.70 1.82
R2 0.26 0.77 0.99
𝑅̅2 0.23 0.75 0.989
N 30 30 30

Standard errors are in parenthesis. ** Significant at 1% level of significance. * Significant at 5% level of

significance.

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Multiple Regression Example 2 (Subprime Mortgages):

Using the “Subprime Mortgage Data” file posted on Campus Web, run a regression of the APR on the FICO
score, the loan-to-value ratio (LTV), income, and home value, and then answer the following questions:
a. Write down the estimated equation.
b. What does each estimated coefficient mean?
c. Using the F-test, test the significance of the model: Are all your explanatory variables
significant?
d. Using the t-test, test the hypothesis that each of your individual estimated coefficients is
significant.
e. What is the 95% confidence interval for FICO score? What does it mean?

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 Econometrics and Forecasting for Business – ECO627

Multiple Linear Regression (MLRM) Modeling Process:

Before you look at the data or the graphs, ask yourself these two questions:

1. Does a linear relationship make sense?

2. Did you include all the relevant variables?
If your answer is “no,” then you need to fix the problem first (transform the data or find the missing
variable). If your answer is “yes,” then,

1. Start with the correlation matrix. Look at the correlation between the response (y variable) and
each explanatory variable. Also, look at the correlations among the explanatory variables.
2. Look at the scatterplots of the response versus each explanatory variable (or at least the ones
that are highly correlated with the response variable). If these scatterplots show linear
relationship between the response and the explanatory variables, then fit the multiple
regression model.
3. Look at the residual plots: The scatterplot of the residuals versus the estimated 𝑌̂ and the
scatterplot of Y versus 𝑌̂.
4. Look at the residual plots of the residuals vs. each explanatory variable.
5. Make sure the residual plots show no patterns nor increase in variance.
6. Make sure the residuals are normally distributed, look at the Histogram of the residuals.
7. Using the F-test, test the overall fit of the model.
8. If the F-test is statistically significant, then use the t-test to test the significance of each
explanatory variable.
Source: Stine and Foster, Univ of Penn, different sources.

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 Regression Applications
Prepared By
Fatma Abdel-Raouf, Ph. D.

Stock Prices and Wall Street Weather:

Edward Saunders published an article testing the possibility that the stock market is affected by the
weather on Wall Street. Using daily data for 28 years, he estimated the following equation:

̂0 + 0.10 Rt-1 + 0.001 Jt – 0.017 Mt + 0.0005 Ct

̂𝑡 = 𝛽
𝐷𝐽
(0.01) (0.0006) (0.004) (0.0002)
t 10 1.6667 - 4.25 2.5

N = 6,911 (daily) 𝑅̅ 2 = 0.02

where DJt the percentage change in the DJIA on day t

Rt the daily index capital gain or loss for day t
Jt a dummy variable =1 if the tth day was in January and 0 otherwise.
Mt a dummy variable =1 if the tth day was a Monday and 0 otherwise.
Ct a variable =1 if the cloud cover was 20% or less, =-1 if the cloud cover was 100%,
and 0 otherwise.

Source: Edward M. Saunders, Jr. (1993). “Stock Prices and Wall Street Weather.” American Economic Review. 76 (1). P. 1337 –
1346. Cited in Studenmud (2011) Using Econometrics: A practical Guide. 6th ed. Pearson Addison-Wesley.

iPod Prices on eBay:

Using data for 215 silver-colored, 4 GB Apple iPod minis sold on eBay, Leonardo Rezende estimated the
following equation (iPod Data file posed on Campus Web):

̂ 𝑖 = 82.67 + 55.42 NEWi – 20.95 SCRATCHi + 0.63 BIDRSi + 0.28 PERCENTi

𝑃𝑅𝐼𝐶𝐸
(19.46) (5.34) (5.12) (0.59) (0.20)
t 5.34 10.38 -4.10 1.07 1.40

N = 215 𝑅̅ 2 = 0.43 SER = 30.57

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where PRICEi the price at which the ith iPod sold on eBay.
NEWi a dummy variable =1 if the ith iPod was new and 0 otherwise.
SCRATCHi a dummy variable =1 if the ith iPod had a minor cosmetic defect and 0
otherwise.
BIDRSi the # of bidders on the ith iPod.
PERCENTi the percentage of customers of the seller of the ith iPod who gave that
seller a positive rating for quality and reliability in previous transactions.

Source: Leonardo Rezende (2008). “Econometrics of Auctions by Least Squares.” Journal of Applied Econometrics.
November/December 2008. P. 925 – 948. Cited in Studenmud (2011) Using Econometrics: A practical Guide. 6th ed. Pearson
Addison-Wesley.

Alumni Donations:
Your friend at the University at Albany has an on-campus job of making phone calls to alumni asking for
donations to the university’s annual fund. To measure the impact of her calls on fund raising, she
collects data from 50 alums and estimates the following equation:

̂i = 2.29 + 0.001 INCOMEi + 4.62 CALLi

GIFT

Where GIFTi the 2011 annual fund donation (in dollars) from the ith alum.
INCOMEi the 2011 income (in dollars) of the ith alum.
CALLi the # of calls to the ith alum asking for a donation in 2011.

Note: If your friend changed the units of INCOME from “dollars” to “thousands of dollars,” its coefficient
will be 1.

Class Attendance and Academic Performance:

In an attempt to determine whether attending class improves students’ academic performance, David
Romer estimated the following equation:

Ĝi = 1.07 + 1.74 ATTi + 0.60 PSi

N = 195 R2 = 0.33

Where Gi the grade of the ith student in Romer’s class (A=4, B=3,…)
ATTi the percent of class lectures that the ith student attended
PSi the percent of the problem sets that the ith student completed.

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