Question

Briefly explain steps that are required to run a regression on a specific model

Answer 1

i)   State the theoretical model, which should be based on a set theory which can be tested and where certain signs on the variables (individual effects) can be stated beforehand. This is then turned into an estimable theoretical model.

ii) Collect the data, the researcher will need to decide on whether to have high frequency data, such as daily data or low frequency data such as annual data, ( assuming it is time series data). Also the length of the data series will need to be chosen, this usually depends on data availability, but in general the more observations the better.

iii) Run the regression using an appropriate technique (OLS based techniques are all we have done so far).

iv) Interpret the results (t-statistics etc) and carry out the usual diagnostic tests (autocorrelation etc). If they are all passed, then draw conclusions from the results and suggest policy implications.

v) If they are failed, then the model needs to be respecified, with extra variables or a change of functional form (i.e. the variables in logarithmic form).

State the theoritical model,collect the sample data required, run the regression model suitable for the sample data, interprete the results and trasnform the model or changes the variable if the model fails.