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 β€œj” categories, then j-1 (β€œj 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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