Steps in the model building process 4 Population multiple linear regression model Assumptions of the multiple linear 10 model 1 5 Multiple correlation and regression Step 2. Step 3. Step 4. Step 5. Step 6. Step 7. Steps in the multiple linear regression model-building process Identify the variables to be included in building the multiple reares- “sion model. : ; Collect sample data. Specify the relationship that exists between the dependent and the independent variables, and between the independent variables. Estimate the parameters of the model specified. Determine whether or not the assumptions of the multiple linear regression model have been met. Statistically test for the usefulness of the mode! developed and for the individual terms in the model. Use the model developed for prediction and estimation. ‘The population multiple linear regression model Po + Bix t Bria t+ + Bate 72 1,2...,N Y= ith dependent random variable corresponding to xi.15 4125 ++» 5 Xie Bo. Bry Ba» Beare (k + 1) parameters in the model. ij = ith level of the jth independent variable, j= 1,2,... , «; = Random error term. Assumptions of the multiple linear regression model expected value of the error component & is 0 (E(e;) = 0}, and the 1. The variance of the error component ¢; is 7 [V(e)) = a7). fori= 1,2... . vn. 2. The error components are uncorrelated, 3. Bos Bis. =< Beare (k #1) parameters, and .s;..i2.. - - sxj,are known. constants. And, for purposes of hypothesis testing and confidence interval esti 4, The error component ¢; is normally distributed.| Hypothesis test for Bi Conditional proba- bility distribution fees point estimate ‘Two-tailed hypothesis test of regression coefficients in multiple regression model Model: Y= fy + Aix; + Barz +++ ++ Bim te Hypothesis: Hy: 8; = 0 Ha: B #0 Test statistic value: ¢ = 2 Soy Decision rule: Reject if: > tun, Do not reject if: ney) OF 1S ~harnteene ~tainntke) SES fatintks where n= Number of observations, k= Number of independent variables, Point estimate of conditional probability distribution variance—multiple linear regression model 2 i ak I SSE ea) (15.1) SVrrttoonth coef X12, | Point estimation of the coefficient of multiple determination, p? The coefficient of multiple determination is defined similarly to the coeffi- cient of determination in the simple linear regression case. That is, the dent variables. The value of r? is computed using equation 15,2. Coefficient of multiple determina Sample coefficient of multiple determination, 1? ficient of multiple determination is the proportion of variability in the random variable Y accounted for or explained by the independent variables +t, This sample statistic measures the relative strength of the linear relationship between the depéndent random variable and the indepen- iNormal plot test | ‘The normality plot test for the normality assumption concerning the residuals Hypotheses: Hy: Error terms are normally distributed, Hq: Error terms are not normally distributed, Test statistic value: r= Correlation between the standardized residuals and the expected standardized residuals (NSCORES).. Decision rule: Reject Hy ifr < ry ‘ Do not reject Hy if r = r. where re is given i Table B.21, Appendix B with a = 0.01, 0.05, and 0.10. ‘The Durbin-Watson test for first-order autocorrelation of the error terms Hypotheses: Ho: p =0 Ha: p>0 where p is the first-order autocorrelation of the error terms. Test statistic value: Seek > where ¢; is the ith residual, and n is the sample size. Decision rule: If DW > d,, do not reject Ho: p If DW < dj, reject Ha: p = 0. If d, = DW = d,, the test is inconclusive The critical values d, and d, are given in Table B.20, Appendix B for and a = 0.01 0.05 The Durbin-Watson test is a test for the first order autocorrelation, p. of the error terms. The first-order autocorrelation p measures the correlation be- tween consecutive pairs of error terms: (€1. €2), (€3. €1), (€1, ea), Although the error terms may be correlated in more complex ways (2.2..(€1. £:), (€2. €4), (x. es}... . ), usually when they are correlated, it is through the first-order correlution of consecutive pairs. The DW test statistic has a minimum value of 0 and a maximum value of 4. If the null hypothesis is true (p = 0), then the expected value of the test statistic is 2. Hence a value of |