Page 23 - FINAL CFA II SLIDES JUNE 2019 DAY 2

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LOS 7.k: Describe limitations of regression analysis. MODULE 7.5: ANOVA TABLES, R , AND SEE

• Linear relationships can change over time (parameter instability). This means that the estimation equation based on
data from a specific time period may not be relevant for forecasts or predictions in another time period.

• Usefulness is limited if other market participants are also aware of and act on any evidence of a historical relation!

• If the assumptions underlying regression analysis do not hold, the interpretation and tests of hypotheses may not be valid.
For example, if the data is heteroskedastic (non-constant variance of the error terms) or exhibits autocorrelation (error terms
are not independent), regression results may be invalid.

READING 8: MULTIPLE REGRESSION
AND ISSUES IN REGRESSION

ANALYSIS