Please Guys, I can’t understand WTF the Dummy variables mean or what it is used for, I read it in schweser but cant figure out what is the case when to use it and how to calculate, and I didn’t find it in the Secret Sauce Either. I am just thinking to avoid it completely, is there anyone who Can help, or should I just skip it ?!!!
it’s a regression independent variable that can only take on a value of 1 or 0 for example, if we have a regression model that checks whether or not wages are influenced by sex, the model will probably include a dummy variable named “isFemale” that will take on a value of 0 or 1. the coefficient of that dummy variable will tell you what the effect of being female is on the dependent variable wage.
Dummy variable - Used to represent the quality being captured by the qualitative independent variable (investor psych) 1 or 0 n-1 periods Say you have 20 periods that you wish to test a qualitative aspect (Investor fear) to the declining SP500. Assign a 0 for investor fear causing the downturn, and assign a 1 for for when fear did not cause the downturn. Subjective yes, but you get the idea. You would then use 19 dummy variables and 1 fixed variable. Hard to put clearly in words, but this is the main idea. You are testing data, and using dummy/fake variables with 1 real variable to compare and contrast the theory you derive.
supersharpshooter Wrote: ------------------------------------------------------- > it’s a regression independent variable that can > only take on a value of 1 or 0 > > for example, if we have a regression model that > checks whether or not wages are influenced by sex, > the model will probably include a dummy variable > named “isFemale” that will take on a value of 0 or > 1. the coefficient of that dummy variable will > tell you what the effect of being female is on the > dependent variable wage. and what about the calculations ?!!
probably ordinary least squares i don’t think you’re actually required to be able to calculate regression coefficients
The LOS says formulate and interpret. Hopefully that means one does not need to calculate. Dummy variables are used in the following models 1. Probit - Normal distribution with the probability that the dependent variable will equal 1 or 100%. 2. Logit - Logistic distribution (easier to compute than probit) with dependent variable equaling 1 or 100% 3. Discriminant - Yields a linear funciton similiar to regression equation to create a score for the dependent variable. (I need help wrapping my head around these, LOS says discuss)