A note on using ratio variables in regression analysis

Donald Lien, Yue Hu and Long Liu

Economics Letters, 2017, vol. 150, issue C, 114-117

Abstract: This paper revisits the problem of choosing ratio variables in regression analysis in Musumeci and Peterson (2011). In the application we examined, linear regressions with the ratio variable, its reciprocal or logarithm have been rejected. To avoid model misspecifications, we suggest to use nonlinear regressions on ratio variables. Our empirical evidence shows that a semiparametric partially linear model could be a robust solution. In particular, the logarithm of the ratio variable performs slightly better than the ratio variable and its reciprocal.

Keywords: Semiparametric regression; Partially linear model; Ratio variable; Market-to-book (search for similar items in EconPapers)
JEL-codes: C10 C14 G30 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:150:y:2017:i:c:p:114-117

DOI: 10.1016/j.econlet.2016.11.019

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