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5-6)
actual Y at
X=1 Ŷ= b1 + b2X
ê=Y-Ŷ
Predicted Ŷ at X=1: Ŷ=b1 + b2*1
X
X=1
Interpreting the model (coefficients)
• Simple linear model: Ŷ= b1 + b2X
– A 1 unit increase in X is associated on average with a b2 unit change in Y
• Quadratic model: Ŷ= b1 + b2X2
– A 1 unit increase in X2 is associated on average with a b2 unit change in Y
• Linear-log model: Ŷ= b1 + b2lnX
– A 1% increase in X is associated on average with a (b2/100) unit change in Y
Ŷ= b1 + b2X
Xbar X0 X
(average of
observed X’s)
Prediction, forecast error, and prediction intervals
• Predicted value Ŷ0= b1 + b2X0
– If we observe X0, we are making an in-sample prediction (this is
what the predict command does)
– If we don’t observe X0, we are making an out-of-sample
prediction (a forecast for Y)
• Forecast error f= Ŷ0-Y0
• To make a prediction interval, use std. error of forecast
rather to account for the fact that our estimate loses
precision as we go farther out-of-sample: