Page 19 - FINAL CFA II SLIDES JUNE 2019 DAY 3
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LOS 8.j: Formulate a multiple regression equation READING 8: MULTIPLE REGRESSION AND ISSUES IN REGRESSION ANALYSIS
by using dummy variables to represent qualitative
factors and interpret the coefficients and
regression results. MODULE 8.5: DUMMY VARIABLES
Dummy variables are qualitative ‘binary’ values used to denote when something occurs (timing). Say:
• “1" if a stock return occurred in January; and
• “0" if it occurred in any other month.
th
4 quarter missing!
b 0 = average value of EPS for the 4th quarter.
b1, b2, b3 = difference in EPS (on average) between quarter
th
1, 2, or 3 and the omitted 4 quarter. Think of the omitted
class as the reference point.
Lets say with 10 years of data (10 * 4 = 40 quarterly observations for 2009)
b = 1.25 | b = 0.75 | b = –0.20 | b 3 = 0.10:
2
1
0
To predict EPS in the 1 quarter 2010, set:
