Financial Modelling and Analysis
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CRICOS 00099F
Financial Modelling and Analysis
Seminar 6
Linear Regression – Simple and Multiple
2Linear Regression
• What is Linear Regression?
• How to estimate regression coefficients?
o Ordinary Least Squares (OLS ) estimation
o Assumptions and properties
• Interpreting coefficients
• Significance of coefficients
• Regression with log variables
• Coefficient of Determination R2
Seminar 6 - Linear Regression – Simple and Multiple
3Correlation
• Measures the strength of the linear relationship between two variables
• Unit less
• Ranges between -1 and 1
o Close to -1: strong negative linear relationship
o Close to 1: strong positive linear relationship
o Close to 0: weak linear relationship
Seminar 6 - Linear Regression – Simple and Multiple
4Linear Correlation
Seminar 6 - Linear Regression – Simple and Multiple
5Linear Regression
• Correlation is about the strength of the relation.
• It does not tell how much one variable is “affected” by the other variables.
• If trading volume increases by 10%, how much would volatility change?
• In regression, one variable is considered:
o the independent variable / predictor (X); and the other is
o the dependent variable / outcome (Y)
• Change in X is used to predict → Change in Y
• A 10% increase in volume is associated with an average of 3% increase in volatility
Seminar 6 - Linear Regression – Simple and Multiple
6Linear Regression
• Regression is a technique to estimate the statistical relation between Y and X.