week9 - I. Some Special Independent Variables 1.Dummy...

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ECON346 (Econometrics) Week9- 1 I. Some Special Independent Variables 1.Dummy variables Some concepts might seem impossible to include in an equation because they are not quantitative like a gender variable. 1) Intercept Dummy a. Examples: seasonal effects, male/female, brands b. Interpretations: if dummy is case, then Y changes by coefficient's value (in units of Y) c. 1 less dummy than alternatives (If there are 2 categories like female and male, then you need only one variable.) 2) Slope Dummy (interaction terms, dummy dependent variables) a. Interaction term is additional term in regression that is multiple of other terms. allow for extra effect if condition of dummy is met. Example: consumption in wartime, production during strikes. b. Include variable, intercept dummy, and interaction term. Otherwise you get bias in estimate of slope dummy. So equation is 0 1 1 2 3 2 i i i i i t Y X D D X β ε = + + + + c. Allows measures of kinks, such as kinked demand curve. 3) Seasonal dummy variables If there exists seasonal factors, such as Monday effect in stock market, summer housing boom market, end of year sales, demands of cold medicine by season, etc. Seasonal sales will be discussed in class. Example)
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This note was uploaded on 05/12/2011 for the course FIN 300 taught by Professor Wang during the Spring '11 term at UChicago.

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week9 - I. Some Special Independent Variables 1.Dummy...

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