[R-SIG-Finance] Fwd: Using dummy variables R

[Patrick Burns]

If you give 'lm' factors representing your
variables instead of dummy variables, then
it will take care of the identification problem
itself.  That's much easier all around.  Your
only problem -- if you care -- is understanding
the meaning of the individual coefficients.  But
I doubt that is a very big problem.


Patrick Burns
patrick at burns-stat.com
+44 (0)20 8525 0696
http://www.burns-stat.com
(home of "The R Inferno" and "A Guide for the Unwilling S User")

P vanzweden wrote:
>  Dear R-helpers,
>
>
>
> I have the following model: Return ~ intercept+ EU + AUS + ASIA + USA +
> office +
> retail + industrial + residential.
>
> The model consist of an intercept ,region- and sector - dummies.
>
>
>
> When including all the dummies and the intercept, I will be caught in a so
> called "dummy variable trap". This problem is a perfect multicollinearity;
> because the regression is not solvable since the X matrix is not fully
> ranked.
>
>
>
> To estimate the model that includes all dummies variables and the intercept,
> I need to imposes two restriction that the sum of the region parameters is
> zero and the sum of the sector parameters is zero.
>
>
>
> How can I estimate this restricted linear regression model in  R?
>
>
> Is this possible to do this in the lm framework?
>
> Thanks in advance,
>
> Peter
>
> 	[[alternative HTML version deleted]]
>
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