A note on using ratio variables in regression analysis. (English) Zbl 1400.62081
Summary: This paper revisits the problem of choosing ratio variables in regression analysis in [J. Musumeci and M. Peterson, “BE/ME and E/P work better than ME/BE or P/E in regressions”, J. Corporate Finance 17, No. 5, 1272–1288 (2011; doi:10.1016/j.jcorpfin.2011.06.003)]. 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.
MSC:
| 62G08 | Nonparametric regression and quantile regression |
| 62P20 | Applications of statistics to economics |
| 62J05 | Linear regression; mixed models |
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