Linear Regression

A regression is a method to calculate the relationships between a dependent variable (Y) and independent variables (Xi). When using this model, you should validate the following: Regression validation

Simple Linear Regression (Go to the calculator)

You may use the linear regression when having a linear relationship between the dependent variable (X) and the independent variable (Y). When adding one unit to X then Y will be changed by a constant value, the b1 coefficient.

H0: Y = b0
H1: Y = b0 + b1X

Regression calculation

The least squares method is used to calculate the coefficients b and a. This approach chooses the line that will minimize the sum of the square length of the real values (Y) from the linear line (ŷ).
$$Min(\sum_{i=1 }^{n}(\hat y_i-y_i)^2)$$ $$b_1=\frac{\sum_{1}^{n}(x_i-\bar{x})(y_i-\bar{y}) }{\sum_{1}^{n}(x_i-\bar{x})^2}\\ b_0=\bar{y}-b_1\bar{x}$$ R2 is the ratio of the variance explained by X with the total variance (Y)
R is the correlation between X and Y
$$R=a*\frac{var(x)}{var(y)}$$

Multiple Linear Regression (Go to the calculator)

When having more than one dependent variable, the multiple regression will compare the following hypothesis, using the F statistic:
H0: Y = b0
H1: Y = b0+b1X1+...+bpXp

Choosing the independent variables is an interactive process. You should check each coefficient for the following hypothesis:
H0: bi = 0
H1: bi ≠ 0

Each time you should remove only the one most insignificant variable (p-value > α) changing the "include" sign from to χ
After removing one insignificant variable, other insignificant variables may become significant in the new model.

Assumptions

Overfitting

It is tempting to increase the number of independent variables to increase the model fitting, but you should beware that any additional independent variable may increase the fitting of the current data but will not improve the prediction of future data.

Cannot calculate the model

The tool will not be able to calculate the model when having one of the following problems. Technically it would not be able to calculate the inverse of the following matrix multiplication: XtX

White test

Test for homoscedasticity, homogeneity of variance using the following hypothesis
$$ H_0: \hat\varepsilon_i^2=b_0\\ H_1: \hat\varepsilon_i^2=b_0+b_1\hat Y_i+b_2\hat Y_i^2 $$ While the ε is the residual and Ŷ is the predicated Y, the test will run a second regression with the following variables:
Independent variable: Y' = ε2.
Dependent variables: X'1=Ŷ, X'2=Ŷ 2.

The tool uses the F statistic which is the result of the second regression. Another option is to use the following statistic: χ2=nR'2 while n is the sample size and R'2 is the result of the second regression.

The regression is robust for the homoscedasticity assumption violation. If you do not meet this assumption, please try one of the following:

Regression calculation

Calculate the regression's parameters without matrices is very complex, but it is very easy with the matrix calculation.
p - number of independent variables.
n - sample size.

Y - dependent variable vector (n x 1). $$\hat Y (predicted \space Y) \space vector (n x 1).$$ X - independent matrix (n x p+1). Ε - Residuals vector (n x 1). B - Coefficient vector (p+1 x 1) $$Y=\begin{bmatrix} &Y_1\\ &Y_2\\ & :\\ &Y_n \end{bmatrix} \hat Y=\begin{bmatrix} & \hat Y_1\\ & \hat Y_2\\ & :\\ & \hat Y_n \end{bmatrix} X=\begin{bmatrix} &1 &X_{11} &X_{12} & .. &X_{1p} \\ &1 &X_{21} &X_{22} & .. &X_{2p} \\ & : & : & : & : & : \\ &1 &X_{n1} &X_{n2} & .. &X_{np} \end{bmatrix} Ε=\begin{bmatrix} & \varepsilon_1\\ & \varepsilon_2\\ & :\\ & \varepsilon_n \end{bmatrix} B=\begin{bmatrix} &b_0\\ &b_1\\ &b_2\\ & :\\ &b_p \end{bmatrix}\\$$ Y = XB + Ε, is equivalent to the following equation: Y = b0 + b1X1 + b2X2+...+bpXp
$$ B = (X'X)^{-1}X'Y\\ \hat Y=XB\\ Ε=Y-\hat Y$$ Calculate the Sum of Squares, Degrees of Freedom and the Mean Squares $$Total: \space SST=\sum_{1}^{n}(Y_i-\bar{Y})^2, \quad DFT=n-1\\ Residual: \space SSE=Ε'Ε, \quad DFE=n-p-1, \quad MSE=\frac{SSE}{DFE} \\ Regression \space SSR=SST-SSE, \quad DFR=p, \quad MSR=\frac{SSR}{DFR}\\ R \space Squared: \space R^2=1-\frac{SSE}{SST}\\ Regression statistic: \space F=\frac{MSR}{MSE} \quad(DFR,DFE)\\ Covariance(B)=MSE(X'X)^{-1}\\ Var(B)=diagonal(Covariance(B))$$ The standard error (SE) vector is the standard deviation of B vector. $$SE(B)=Sqrt(Var(B))$$ Following T vector that contains the t statistics for each coefficient significance $$T_i=\frac{B_i}{SE_i}(DFE)$$ Coefficients Confident Interval $$Lower=B_i+SE_i+t_{\alpha/2}(DFE)\\ Upper=B_i+SE_i+t_{1-\alpha/2}(DFE)\\ $$

Numeric Example

X1X2Y
112.1
223.9
336.3
414.95
527.1
638.5

Following the data as a matrix structure.
$$Y=\begin{bmatrix} &2.1\\ &3.9\\ &6.3\\ &4.95\\ &7.1\\ &8.5\\ \end{bmatrix} \quad X=\begin{bmatrix} &1 &1 &1 \\ &1 &2 &2 \\ &1 &3 &3 \\ &1 &4 &1 \\ &1 &5 &2 \\ &1 &6 &3 \end{bmatrix} $$ The first column of the X matrix contains only the value 1 for the b intercept. $$ B = (X'X)^{-1}X'Y\\\\ X'=\begin{bmatrix} &1 &1 &1 &1 &1 &1\\ &1 &2 &3 &4 &5 &6\\ &1 &2 &3 &1 &2 &3 \end{bmatrix} \quad XX'=\begin{bmatrix} &6 &21 &12\\ &21 &91 &46\\ &12 &46 &28 \end{bmatrix} \quad (X'X)^{-1}=\begin{bmatrix} & 4/3 & -1/9 & -7/8\\ & -1/9 & 2/27 & -2/27\\ & -7/18 & -2/27 &35/108 \end{bmatrix} $$ $$ H=(X'X)^{-1}X'=\begin{bmatrix} &25/72 & -23/36 & -13/8 &1/72 & -35/36 & -47/24\\ & -1/9 & -1/9 & -1/9 &1/9 &1/9 &1/9\\ & -5/8 & -3/8 & -1/8 & -61/72 & -43/72 & -25/72 \end{bmatrix}$$ $$B=HY=\begin{bmatrix} &0.2250\\ &0.9167\\ &1.0208 \end{bmatrix} \quad \hat Y=XB=\begin{bmatrix} &2.1625\\ &4.1\\ &6.0375\\ &4.9125\\ &6.85\\ &8.7875\\ \end{bmatrix} \quad Ε=\begin{bmatrix} & -0.0625\\ & -0.2\\ & 0.2625\\ & 0.0375\\ & 0.25\\ & -0.2875\\ \end{bmatrix} $$

Y = 0.2250 + 0.9167X1 + 1.0208X2
SSDFMS
Total (T)26.6187213.1797
Residual (E)0.259430.08646
Regression (R)26.618755.3237

R2 = 0.9903
F = 152.4398 $$ Covariance(B)=\begin{bmatrix} & 0.1153 & -0.0096 & -0.0336\\ & -0.0096 & 0.0064 & -0.0064\\ & -0.0336 & -0.0064 & 0.0280 \end{bmatrix} \quad Var(B)=\begin{bmatrix} &0.1153\\ &0.0064\\ &1.0280 \end{bmatrix} \quad T=\begin{bmatrix} &0.6627\\ &11.4545\\ &6.0986 \end{bmatrix} \quad $$