Econometric Lec7

TOPICS IN
ECONOMETRICS
7
LECTURE
1
CHAPTER 15
Qualitative Response
Regression Models
2
The Nature of Qualitative
Response Models
The dependent variable is categorical
- Binary or Dichotomous: 2 categories
- Polychotomous or multiple-category:
more than 2 categories
3
Examples
- Smoking or not smoking
- Owning a house or not Owning a house
- Participating the labor force or not
- Selecting the brands of products A, B or C
- Voting for Parties A, B or C

4
Methods of Modeling
• We will consider the dependence of Probability of
something happening on independence variables.
• Some Models can be used:
- The Linear Probability Models (LPM)

- The Logit Model (Logistic Regression)
- The Probit Model (CDF Normal)
- The Multinomial Model
5
The Linear Probability Model (LPM)
• Assume that the dependent variable has two

categories:
- A family owns a house
- A family does not own a house
Let Yi=1 if owns a house and Yi=0 otherwise
Yi follows Bernoulli Distribution with Probability Pi
P(Yi=1)= Pi
E(Yi/Xi)= Pi 6
• Modeling:The Linear Probability Models

E(Yi/Xi)= Pi= β1 + β2Xi
Condition: 0 ≤ E(Yi/Xi) ≤ 1
• Some Problems:
- Non-Normality of ui
- Heteroscedasticity
- Nonfulfillment of 0 ≤ E(Yi/Xi) ≤ 1 7
- Value of R2
8
Example
Table 15.1: Estimate LPM for the data of the

families owning a house or not depending on
Income
9
The Logit Model
• Normally, Pi is nonlinear related to Xi
• We better use the Cumulative Distribution Function10

The Logit Model
• Logistic Distribution Function
exp( 1   2 X i )
Pi 
1  exp( 1   2 X i )
• Odds ratio:
Pi
 e 1   2 X i
1  Pi
• Log-odds Ratio form:

Pi
Li  ln  1   2 X i
1  Pi 11
The Logit Model - Interpretation
• Slope coefficient measures how L change for 1

unit change in X. L means the log of the odds
in favor of Y=1. Then, the odds of Y=1
changes by exp(β2)
• dP/dX=β2 P(1-P): then, if we want to know how

P changes when X change, we need to know
P change at what level.
12
The Logit Model - Estimation
• We can not use OLS method to estimate

parameters as if Y=1, we have L=ln(1/0) and
Y=0, L=ln(0/1). For logistic regression, we
have to use Maximum Likelihood (ML) method
to estimate the parameters.
(see appendix 15A for more details)
• The value of log likelihood function is similar to

RSS in OLS.
13
The Logit Model - Inference
• As we use (ML) method, the sample should be large.

Then, instead of using t-stats to test for significance
of parameters, we use z-test.
• As for binary data, R2 defined as ESS/TSS is

normally not meaningful. We will use pseudo R2 to
measure the goodness of fit of the model.
- McFadden R2 defined as 1-[lnL(Mfull)/lnL(Mintercept))]
- Count R2 defined as #of correct predictors/n
in which predicted Prob > 0.5 will be classified as 1
predicted Prob < 0.5 will be classified as 0
14
The Logit Model - Inference
• To test for the significance of the model (similar

to F test in OLS method), we use Likelihood
Ratio (LR) statistic. LR follows chi square
Distribution with df=#of independent variables
• LR= -2ln[L(Mfull)/L(Mintercept))]
15
The Logit Model - Examples
• Example for the table 15.7
• Problem 15.7 book page 583
• Problem 15.9 book page 583
16
The Probit Model
• We use CDF normal to construct the model for
Probability Pi
• Pi=P(Y=1)=F(β1 + β2Xi)
• Let Ii=β1 + β2Xi,, Ii are called utility index
• Ii= F-1(Pi)= β1 + β2Xi
• dP/dX=f(β1 + β2Xi) β2 . This measures how P change for

1 unit change of X in which f(.) is the normal density
function
17
The Probit Model
18
The Probit Model
CDF normal
19
The Probit Model
Examples
- Redo the example for the table 15.7 using

probit model.
- Problem 15.19 on page 589.
20
Multinomial Logit Model
• Assume we have J choices A0, A1, A2...Aj,
J>2 (J categories).
• We want to modeling the probability
choice Aj will be selected.
• Extend the logit model for Binary data
• Select one category as the baseline.
• The logistic model of the category j is:
21
Multinomial Logit Model
• For category j
exp(1 j   2 j X ij )
Pij 
1  exp(1 j   2 X ij )
For baseline category
1
Pij 
1  exp(1 j   2 X ij )
22
Log-odds Ratio Form
Pij
L j  ln  1 j   2 j X ij
1  Pij
23
Model for Count Data
Example:
- Number of registered students to a course per year
- The number of visits to the hospital per year
- The number of cars parking with 1 hour
We want to study the dependence of these above

factors on some other factors  Use the regression
model for count data
24
Model for Count Data
Poisson Distribution:
- Probability mass function
P(Y=yi)= µyiexp(-µ)/(yi)!
E(Y)= µ and V(Y)= µ
- Linear regression model:
E(Yi)= µi = β1+ β2X2i+...+ βkXki

25
THE END
26

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TOPICS IN

The dependent variable is categorical

- Binary or Dichotomous: 2 categories

- Smoking or not smoking

- Owning a house or not Owning a house

- Participating the labor force or not

- Selecting the brands of products A, B or C

- Voting for Parties A, B or C

• Some Models can be used:

- The Linear Probability Models (LPM)

• Assume that the dependent variable has two

• Modeling:The Linear Probability Models

Table 15.1: Estimate LPM for the data of the

• Normally, Pi is nonlinear related to Xi

• We better use the Cumulative Distribution Function10

• Log-odds Ratio form:

• Slope coefficient measures how L change for 1

• dP/dX=β2 P(1-P): then, if we want to know how

• We can not use OLS method to estimate

• The value of log likelihood function is similar to

• As we use (ML) method, the sample should be large.

• As for binary data, R2 defined as ESS/TSS is

• To test for the significance of the model (similar

• Example for the table 15.7

• Problem 15.7 book page 583

• Problem 15.9 book page 583

• Let Ii=β1 + β2Xi,, Ii are called utility index

• Ii= F-1(Pi)= β1 + β2Xi

• dP/dX=f(β1 + β2Xi) β2 . This measures how P change for

- Redo the example for the table 15.7 using

- Problem 15.19 on page 589.

We want to study the dependence of these above

E(Y)= µ and V(Y)= µ

- Linear regression model:

E(Yi)= µi = β1+ β2X2i+...+ βkXki

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