Qualitative and Dummy Variables in Regression Modeling
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- Handle qualitative independent variables with a quantitative proxy or use a dummy variable.
- When using a dummy independent variables (such as assigning a number to the degree of consumer confidence), define a collectively exhaustive set of “j” categories, then j-1 (“j minus one”) will give you the number of dummy variables for inclusion in your model.
- Models with dummy independents can easily be misspecified.
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