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Dummy variables Hill et al chapter 9. Parameters that vary between observations Assumption MR1 The parameters are the same for all observations. k= the.

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Presentation on theme: "Dummy variables Hill et al chapter 9. Parameters that vary between observations Assumption MR1 The parameters are the same for all observations. k= the."— Presentation transcript:

1 Dummy variables Hill et al chapter 9

2 Parameters that vary between observations Assumption MR1 The parameters are the same for all observations. k= the change in E(y t ) when x tk is increased by one unit, and all other variables are held constant

3 A model of house prices is the value of an additional square foot of living area, and is the value of the land alone This model omits to take account of location

4 Intercept Dummy Variables

5 Slope dummy variable

6 Combined intercept and slope dummy variables

7 The effect of a university on house prices: model

8 The effect of a university on house prices: data

9 The effect of a university on house prices: results

10 The effect of a university on house prices: conclusions

11 Qualitative Variables with Several Categories Note that E 0 is excluded. The dummy variable trap

12 Interpretation of the wage equation

13 Testing for the existence of qualitative effects H 0 : =0 H 1 : 0, or >0 Test using a t test

14 Testing the equivalence of two regressions using dummy variables Known as the Chow Test

15 Testing the equivalence of investment demand in two firms Restricted Equation (No dummies) Unrestricted Equation (Dummy applied to all parameters) F

16 An alternative way of computing SSU in the Chow test Estimate the simplified equation: for each firm separately SSE u = SSE1 + SSE2


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