Regression analysis can be a powerful method for understanding the relationships between different variables, but it can be tricky. Without proper guidance, you could end up with inaccurate results that are difficult to interpret.
This blog post will teach you the definition of regression analysis, procedures for selecting variables, how it works, types, and uses; we’ll also cover the mistakes people make when working with it and provide tips for getting the most out of this method.
What is Regression Analysis?
Regression Analysis is a way of figuring out how different things are related. This can help you understand how one thing affects another.
If there are two variables, the variable that acts as the basis of estimation is the independent variable. The variable whose value is to be estimated is known as the dependent variable.
The dependent variable is also popular as a predictor, response, and endogenous variable, while the independent variable is an explanatory, regressor, and exogenous variable.
You can also use it to figure out what will happen in the future if things stay the same.
This is a powerful tool that people use in business and social sciences.
What is regression?
Regression is a statistical term generally used in finance and investing that determines the strength and attribute of the relationship between one dependent variable and a series of independent variables.
Regression can be used for classification and prediction purposes to identify patterns in data and relationships between variables and predict future trends. As a result, regression models are applied across multiple fields, from finance to economics, and have applications in business forecasting.
Three procedures for selecting variables
- Stepwise regression – The type of regression performed to determine which variables in the regression equation are significant predictors of the dependent variable.
- Backward elimination – Form of regression used to remove independent variables from a model one at a time.
- Forward selection – This method starts with no predictor (independent) variables and adds them individually until the model improves.
Regression analysis types
In statistics, linear regression is a method to predict the value of an outcome variable based on one or more predictor variables. The case where there are two predictor variables is called bivariate linear regression, but simple linear regression refers only to the case in which there is a single predictor variable. Therefore, more than two predictor variables would be classified as multivariate linear regression.
There are two kinds of linear regression: Simple and multiple regression.
Simple regression is the most basic type of regression. There is only one independent variable and one dependent variable in simple regression. Simple regression aims to find the regression line that best fits the data.
Equation for simple regression:
Where, Y= Dependent variable
X= Independent(Explanatory) variable
a= Intercept, b= Slop, u= The regression residual
Multiple regression is a type of analysis that uses more than one predictor variable to predict the dependent variable. In multiple regression, the model simultaneously fits the data using all the predictor variables. This allows the model to account for the interdependencies among the predictor variables.
The equation for Multiple regression:
Where Y= Dependent variable
X1, X2, X3, X4= Independent (Explanatory) variables
a= Intercept, b,c,d= Slops, u= the regression residual
Stepwise regression is a type of multiple regression that uses an iterative algorithm to find the best data model. This regression algorithm starts by including all of the predictor variables in the model.
Then, it removes the predictor variable that has the smallest p-value. This process is repeated until you can eliminate no more predictors without increasing the p-value of the model.
Logistic regression is a statistical method for predicting binary classes. The outcome or target variable is dichotomous.
Dichotomous means there are only two possible classes. For example, it can be used for cancer detection problems. It computes the probability of an event occurrence.
Lasso Regression used to find the best fitting line for a data set. It uses the “least absolute shrinkage and selection operator,” or Lasso, to find the line.
Lasso regression is used when there are many variables in the data set, and the goal is to find the best fit line while minimizing the number of variables.
Ridge Regression is a technique used in statistics to reduce the variance of the estimates produced by linear regression models.
Ridge regression incorporates a penalty term in the solved optimization problem. This penalty term increases as the magnitude of the estimated coefficients increases, leading to smaller estimated coefficients.
Elastic Net Regression
The Elastic Net is a combination of Ridge Regression and Lasso Regression. The Elastic Net uses both a ridge penalty and a lasso penalty in its optimization problem. This leads to smaller estimated coefficients than either Ridge Regression or Lasso Regression alone.
Polynomial regression models the relationship between an outcome variable and one or more predictor variables.
Polynomial regression uses the power of a polynomial function to fit data instead of just using a linear function like in Linear Regression. Polynomial regression can be used for both classification and regression problems.
Arbitrary regression uses a random function to model the relationship between an outcome variable and more predictor variables. Random regression can be used for both classification and regression problems.
It is often used when there is no linear relationship between the predictor and outcome variables.
General Regression uses any combination of the regressions mentioned earlier. General Regression can be used for both classification and regression problems. It allows you to use whichever type(s) of regressions are best suited for your data set.
Quantile regression analysis
A statistical technique is used to estimate the relationships between dependent variables and one or more independent variables. This technique assesses the impact of an independent variable on the dependent variable across the entire range of independent variables, rather than just at its mean.
How does it work?
- The first step in regression analysis is identifying the independent and dependent variables. The independent variable is the factor you are trying to predict or explain, while the dependent variable is the outcome you are trying to measure.
- The second step is to calculate the linear regression equation. This equation will show the relationship between the independent and dependent variables.
- The third step is to perform a regression analysis of your data. That will determine whether the linear regression equation is a good fit for your data. If it is not, you may need to adjust the equation accordingly.
- It helps in devising a functional relationship between two variables
- It is one of the widely used tools in economic and business research where statistical interpretations are highly valued as their analysis is based more on cause and effect relationships
- It helps in predicting the dependent variable value from the independent variable values
- The coefficient of correlation and coefficient of determination can be established with the help of regression coefficients
Tips while working with regression analysis
- Always inspect your data to make sure it is appropriate for regression analysis.
- Make sure you understand the type of regression you are using and how it works.
- Choose the correct type of regression for your data set.
- Use a linear regression when there is a linear relationship between the predictor and outcome variables.
- Use a polynomial regression when there is a non-linear relationship between the predictor and outcome variables.
- Use a logistic regression when the outcome variable is binary (has only two possible classes).
- Use stepwise regression to find the best model for your data set.
Give real-life example of regression analysis
A grocery store might want to know if the price of eggs is related to the number of eggs sold. They could do a regression analysis to find out. They would gather data on how many eggs are sold each week at different prices and then use a software program to see if a line can be drawn that best predicts the number of eggs sold based on the price of eggs.
If there is a relationship between price and the number of eggs sold, then the grocery store can raise or lower their prices accordingly to sell more or fewer eggs.
By understanding how regression works and using it effectively, you can gain insights into your data that can help you make better business decisions. Regression analysis can be used in almost any industry, but economists most frequently use it to predict changes in the economy.
In this post, we have looked at the different types of regression and when you should use each variety. We have also looked at some tips for working with regression analysis. Hoping you have found this post helpful!