PowerPointSlides1-CollegeofBusinessAdministration.pptVIP

To compare two R2 terms, one must take into account the number of X variables present in the model. This can be done readily if we consider an alternative coefficient of determination, which is as follows: Rˉ2 = 1 ? (Σu?2i / (n? k)) / (Σy2i /(n? 1)) (7.8.2) where k = the number of parameters in the model including the intercept term. (In the three-variable regression, k = 3. The R2 thus defined is known as the adjusted R2, denoted by Rˉ2. Equation (7.8.2) can also be written as Rˉ2 = 1 ? σ?2 / S2Y (7.8.3) where σ?2 is the residual variance, an unbiased estimator of true σ2, and S2Y is the sample variance of Y. It is easy to see that Rˉ2 and R2 are related because, substituting (7.8.1) into (7.8.2), we obtain Rˉ2 = [1 ? (1 ? R2)] [(n? 1) / (n? k)] (7.8.4) It is immediately apparent from Eq. (7.8.4) that (1) for k 1, Rˉ2 R2 which implies that as the number of X variables increases, the adjusted R2 increases less than the unadjusted R2; and (2) Rˉ2 can be negative, although R2 is necessarily nonnegative. In case Rˉ2 turns out to be negative in an application, its value is taken as zero. Which R2 should one use in practice? the adjusted R2, as given in (7.8.4), that is reported by most statistical packages along with the conventional R2. The reader is well advised to treat Rˉ2 as just another summary statistic. Comparing Two R2 Values In comparing two models on the basis of the coefficient of determination, the sample size n and the dependent variable must be the same; the explanatory variables may take any form. Thus for the models ln Yi = β1 + β2X2i + β3X3i + ui (7.8.6) Yi = α1 + α2X2i + α3X3i + ui (7.8.7) The computed R2 terms cannot be compared. the two dependent variables are not the same thing: As noted in Chapter 6, a change in lnY gives a relative or proportional change in Y, whereas a change in Y gives an absolute change. Therefore, varY?i/varYi is not equal to var (ln Yi)/var (ln Yi); that is, the two coefficients of determina