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Basic Econometrics
Chapter 1:
THE NATURE OF
REGRESSION
ANALYSIS
Prof. Himayatullah
1
May 2004
1-1. Historical origin of the term
“Regression”
The term REGRESSION was
introduced by Francis Galton
 Tendency for tall parents to have tall
children and for short parents to have
short children, but the average height
of children born from parents of a
given height tended to move (or
regress) toward the average height in
the population as a whole (F. Galton,
“Family Likeness in Stature”)

Prof. Himayatullah
2
May 2004
1-1. Historical origin of the term
“Regression”
Galton’s Law was confirmed by Karl
Pearson: The average height of sons of
a group of tall fathers < their fathers’
height. And the average height of sons
of a group of short fathers > their
fathers’ height. Thus “regressing” tall
and short sons alike toward the average
height of all men. (K. Pearson and A.
Lee, “On the law of Inheritance”)
 By the words of Galton, this was
“Regression to mediocrity”

Prof. Himayatullah
3
May 2004
1-2. Modern Interpretation of
Regression Analysis


The modern way in interpretation of
Regression: Regression Analysis is
concerned with the study of the
dependence of one variable (The
Dependent Variable), on one or more
other variable(s) (The Explanatory
Variable), with a view to estimating
and/or predicting the (population)
mean or average value of the former in
term of the known or fixed (in
repeated sampling) values of the latter.
Examples: (pages 16-19)
Prof. Himayatullah
4
May 2004
Dependent Variable Y; Explanatory Variable Xs
1. Y = Son’s Height; X = Father’s Height
2. Y = Height of boys; X = Age of boys
3. Y = Personal Consumption Expenditure
X = Personal Disposable Income
4. Y = Demand; X = Price
5. Y = Rate of Change of Wages
X = Unemployment Rate
6. Y = Money/Income; X = Inflation Rate
7. Y = % Change in Demand; X = % Change in the
advertising budget
8. Y = Crop yield; Xs = temperature, rainfall, sunshine,
fertilizer
Prof. Himayatullah
5
May 2004
1-3. Statistical vs.
Deterministic Relationships

In regression analysis we are
concerned with STATISTICAL
DEPENDENCE among variables (not
Functional or Deterministic), we
essentially deal with RANDOM or
STOCHASTIC variables (with the
probability distributions)
Prof. Himayatullah
6
May 2004
1-4. Regression vs. Causation:
Regression does not necessarily imply
causation. A statistical relationship
cannot logically imply causation. “A
statistical relationship, however strong
and however suggestive, can never
establish causal connection: our ideas
of causation must come from outside
statistics, ultimately from some theory
or other” (M.G. Kendal and A. Stuart,
“The Advanced Theory of Statistics”)
Prof. Himayatullah
7
May 2004
1-5. Regression vs.
Correlation


Correlation Analysis: the primary objective
is to measure the strength or degree of
linear association between two variables
(both are assumed to be random)
Regression Analysis: we try to estimate or
predict the average value of one variable
(dependent, and assumed to be stochastic)
on the basis of the fixed values of other
variables (independent, and non-stochastic)
Prof. Himayatullah
8
May 2004
1-6. Terminology and Notation
Dependent Variable

Explained Variable

Predictand

Regressand

Response

Endogenous
Prof. Himayatullah
Explanatory
Variable(s)

Independent
Variable(s)

Predictor(s)

Regressor(s)

Stimulus or control
variable(s)

Exogenous(es)
9
May 2004
1-7. The Nature and Sources
of Data for Econometric
Analysis
1) Types of Data :
 Time series data;
 Cross-sectional data;
 Pooled data
2) The Sources of Data
3) The Accuracy of Data
Prof. Himayatullah
10
May 2004
1-8. Summary and Conclusions
1) The key idea behind regression
analysis is the statistic dependence of
one variable on one or more other
variable(s)
2) The objective of regression analysis is
to estimate and/or predict the mean or
average value of the dependent
variable on basis of known (or fixed)
values of explanatory variable(s)
Prof. Himayatullah
11
May 2004
1-8. Summary and Conclusions
3) The success of regression depends on
the available and appropriate data
4) The researcher should clearly state the
sources of the data used in the analysis,
their definitions, their methods of
collection, any gaps or omissions and
any revisions in the data
Prof. Himayatullah
12
May 2004