Econometrics HT 18

Chapter 21 : Dummy variables

By Lund University

When your explanatory variables are group belongings.

Dummy variables

If all observations belong to one out of two groups, then a dummy variable can be used to encode this information. A dummy variable will take the value zero for all observations belong to one group and one for all the remaining observations belonging to the other group. We can use a dummy variable as an explanatory variable in a linear regression model in the same way that we use an ordinary explanatory variable. Dummy variables can be used even if you have more than two groups.

The LRM with a dummy variable

LRM with more than two categories

Interactive dummy variables

The Chow test