4 REGRESSION ANALYSIS

• Regression analysis examines a dependence between two or more variables, e.g. an income may be determined by education, years of experience or gender, etc.

• Equation which describes a linear dependence (relationship) between two variables is called a simple regression

$$\begin{equation} Y=\beta_0+\beta_1X+u \tag{2.5} \end{equation}$$

• Variable $Y$ on the right side is dependent variable (sometimes called endogenous

• Variable $X$ on the left side is independent variable (sometimes called exogenous)

• Variable $u$ on the left side is unobserved random variable (sometimes called error term)

• Regression equation (2.5) suggests that $X$ causes $Y$

• Linear dependence can be measured by correlation coefficient, but correlation does not imply causality direction)

• Parameters $\beta_0$ and $\beta_1$ are the constant and the slope, respectively. These population parameters are not known and should be estimated from the sample data

• The slope coefficient provides information about change in $Y$ with respect to one unit change in $X$

$$\begin{equation} \beta_1=\frac{\Delta Y}{\Delta X} \tag{4.1} \end{equation}$$