Chapter 8 Indicator Variable

Ray-Bing Chen
Institute of Statistics
National University of Kaohsiung

8.1 The General Concept of

Indicator Variables
The Variables in regression analysis:
Quantitative variables: well-defined scale of
measurement. For example: temperature,
distance, income,
Qualitative variable (Categorical variable): for
example: operators, employment status
(employed or unemployed), shifts (day, evening
or night), and sex (male or female). Usually no
natural scale of measurement.
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 Assign a set of levels to a qualitative variable to

account the effect that variable may have on the
response. (indicator variable or dummy variable)
For example: The effective life of a cutting tool
(y) v.s. the lathe speed (x1) and the type of cutting
tool (x2).

Example 8.1 Tool Life Data

The scatter diagram is in Figure 8.2.
Two different regression lines.

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 Two separate straight-line models v.s. a single

model with an indicator variable:
Prefer the single-model approach (a simpler
practical result)
Since assume the same slope, it makes sense to
combine the data from both tool types to
produce a single estimate of this common
parameter.
Can give one estimate of the common error
variance 2 and more residual degrees of
freedom.
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 Different in intercept and slope:

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Example 8.2 The Tool Life Data:

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Example 8.3 An Indicator Variable with More Than

Two Levels
Total electricity consumption (y) v.s. the size of
house (x1) and the four types of sir condition
systems.
Four types of air conditions systems:

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3 - 4: relative efficiency of a heat pump compared

to central air conditioning.
Assume the variance doesnt depend on the types.19

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Example 8.4 More Than One Indicator Variable

Add the type of cutting oil used in Example 8.1

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8.2 Comments on the Use of

Indicator Variables
8.2.1 Indicator Variables versus Regression on
Allocated Codes
Another approach to measure the levels of the
variables is by an allocated code.
In Example 8.3,

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 The allocated codes impose a particular metric on

the levels of the qualitative factor.
Indicator variables are more informative because
they do not force any particular metric on the
levels of the qualitative factor.
Searle and Udell (1970): regression using
indicator variables always leads to a larger R2 than
does regression on allocated codes.

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8.2.2 Indicator Variables as a Substitute for a

Quantitative Regressor
Quantitative regressor can also be represented by
indicator variables.
In Example 8.3, for income factor:

Use four indicator variables to represent the factor

income.
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 Disadvantage:
More parameters are required to represent the
information content of the quantitative factor.
(a-1 v.s. 1) So it would increase the complexity
of the model.
Reduce the degrees of freedom for error.
Advantage: It does not require the analyst to make
any prior assumptions about the functional form of
the relationship between the response and the
regressor variable.

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8.3 Regression Approach to

Analysis of Variance
The Analysis of Variance is a technique frequently
used to analyze data from planned ot designed
experiments.
Any ANOVA problem can be treated as a linear
regression problem.
Ordinarily we do not recommend that regression
mothods be used for ANOVA because the
specialized computing techniques are usually quite
efficient.
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 However, there some ANOVA situation,

particularly those involving unbalance designs,
where the regression approach is helpful.
Essentially, any ANOVA problem can be treated as
a regression problem in which all of the regressors
are indicator variables.

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 Define the treatment effects in the balance case (an

equal number of observations per treatment) as 1
+ 2 + + k = n
i = + i is the mean of the ith treatment.
Test H0 : 1 = 2 = = k = 0 v.s. H1 : 2 0 for at
least one i

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Example: 3 treatments
Model: yij = + i + ij , i = 1, 2, 3, j = 1, 2, , n

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