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CHAPTER 14
MULTIPLE REGRESSION
Prem Mann, Introductory Statistics, 7/E

Copyright © 2010 John Wiley & Sons. All right reserved
MULTIPLE REGRESSION ANALYSIS
Definition
A regression model that includes two or
more independent variables is called a
multiple regression model. It is written as
y = A + B1x1 + B2x2 + B3x3+ … + Bkxk + ε
where y is the dependent variable, x1, x2,
x3, …, xk are the k independent variables,
and ε is the random error term.

MULTIPLE REGRESSION ANALYSIS
When each of the xi variables represents a
single variable raised to the first power as
in the above model, this model is referred
to as a first-order multiple regression
model. For such a model with a sample
size of n and k independent variables, the
degrees of freedom are: df = n - k - 1

ASSUMPTIONS OF THE MULTIPLE
REGRESSION MODEL
Assumption 1: The mean of the
probability distribution of ε is zero, that is,
E(ε) = 0
Assumption 2: The errors associated with

different sets of values of independent
variables are independent. Furthermore,
these errors are normally distributed and
have a constant standard deviation, which
is denoted by σε.

ASSUMPTIONS OF THE MULTIPLE
REGRESSION MODEL
Assumption 3: The independent variables
are not linearly related. However, they
can have a nonlinear relationship. When
independent variables are highly linearly
correlated, it is referred to as
multicollinearity.
Assumption 4: There is no linear

association between the random error
term ε and each independent variable xi.

STANDARD DEVIATION OF ERRORS
The standard deviation of errors (also

called the standard error of the estimate)
for the multiple regression model is
denoted by σε, and it is a measure of
variation among errors. However, when
sample data are used to estimate multiple
regression model, the standard deviation
of errors is denoted by se. The formula to
calculate se is as follows.

STANDARD DEVIATION OF ERRORS
SSE
where SSE    y  yˆ 
2
Se 
n  k 1
Note that here SSE is the error sum of

squares. We will not use this formula to
calculate se manually. Rather we will
obtain it from the computer solution.
Note that many software packages label
se as Root MSE, where MSE stands for
mean square error.
COEFFICIENT OF MULTIPLE
DETERMINATION
The coefficient of determination for the
multiple regression model, usually called
the coefficient of multiple
determination, is denoted by R2 and is
defined as the proportion of the total sum
of squares SST that is explained by the
multiple regression model. It tells us how
good the multiple regression model is and
how well the independent variables
included in the model explain the
dependent variable.
DETERMINATION
0R 12
SSE   e    y  yˆ 
2 2
SST  SSyy    y  y 
2
SSR    yˆ  y 
2

DETERMINATION
SSR is the portion of SST that is explained
by the use of the regression model, and
SSE is the portion of SST that is not
explained by the use of the regression
model. The coefficient of multiple
determination is given by the ratio of SSR
and SST as follows.
SSR
R 
2
SST
Characteristics of R2
 The value of R2 generally increases as we
add more and more explanatory variables
to the regression model (even if they do
not belong in the model).
 Increasing the value of R2 does not imply
that the regression equation with a higher
value of R2 does a better job of predicting
the dependent variable.
 It will not represent the true explanatory
power of the regression model.

 Instead, we use the adjusted coefficient
of multiple determination R2.
 The value of R2 may increase, decrease,
or stay the same as we add more
explanatory variables to our regression
model.
 If a new variable added to the regression
model contributes significantly to explain
the variation in y, then R2 increases;
otherwise it decreases. The value of R2 is
calculated as follows.
 n 1  SSR /  n  k  1
R  1  1  R  
2 2
 or 1 
 n  k  1 SST /(n  1)
Another property of R2 to remember is that

whereas R2 can never be negative, R2 can
be negative.

COMPUTER SOLUTION OF MULTIPLE
REGRESSION
In this section, we take an example of a
multiple regression model, solve it using
MINITAB, interpret the solution, and make
inferences about the population parameters
of the regression model.

Example 14-1
A researcher wanted to find the effect of
driving experience and the number of
driving violations on auto insurance
premiums. A random sample of 12 drivers
insured with the same company and
having similar auto insurance policies was
selected from a large city.

Example 14-1
Table 14.1 lists the monthly auto insurance
premiums (in dollars) paid by these
drivers, their driving experiences (in
years), and the numbers of driving
violations committed by them during the
past three years. Using MINITAB, find the
regression equation of monthly premiums
paid by drivers on the driving experiences
and the numbers of driving violations.

Table 14.1

Example 14-1: Solution
Let
y = the monthly auto insurance premium
(in dollars) paid by a driver
x1 = the driving experience (in years) of a
driver
x2 = the number of driving violations
committed by a driver during the past
three years

We are to estimate the regression model

y = A + B 1x 1 + B 2x 2 + ε
Enter the given data of Table 14.1 in

columns C1, C3, and C3 into MINITAB.
Name them Monthly Premium, Driving
Experience and Driving Violations, as
shown in Screen 14.1.

Using SPSS
Click OK to obtain the output, which is
shown in Screen 14.3.
From the output given in SPSS, the

estimated regression equation is:
y = 110.276 – 2.747x1 + 16.106x2
We can also use MINITAB to obtain

estimated regression line.

Using Minitab

To obtain the estimated regression
equation, select Stat > Regression >
Regression. In the dialog box you obtain,
enter Monthly Premium in the Response
box, and Driving Experience and Driving
Violations in the Predictors box as shown
in Screen 14.2.

Use SPSS/MINITAB solution and answer the
following questions.
(a) Explain the meaning of the estimated

regression coefficients.
(b) What are the values of the standard
deviation of errors, the coefficient of
multiple determination, and the adjusted
coefficient of multiple determination?

Example 14-2
(c) What is the predicted auto insurance
premium paid per month by a driver with
seven years of driving experience and
three driving violations committed in the
past three years?
(d) What is the point estimate of the
expected (or mean) auto insurance
premium paid per month by all drivers with
12 years of driving experience and 4
driving violations committed in the past
three years?
(a) From the portion of the MINITAB
solution that is marked I in Screen 14.3 or
from the column labeled Coef in the
portion of the output marked II in the
MINITAB solution of Screen 14.3, we
obtain
a = 110.28, b1 = -2.7473, b2 = 16.106.
The estimated regression equation as
y = 110.28 - 2.7473x1 + 16.106x2

The value of a = 110.28 in the estimated
regression equation gives the value of y for
x1 = 0 and x2 = 0. Thus, a driver with no
driving experience and no driving
violations committed in the past three
years is expected to pay an auto insurance
premium of $110.28 per month.

The value of b1 = -2.7473 in the estimated
regression model gives the change in y for
a one-unit change in x1 when x2 is held
constant. Thus, we can state that a driver
with one extra year of experience but the
same number of driving violations is
expected to pay $2.7473 (or $2.75) less
per month for the auto insurance
premium.

The value of b2 = 16.106 in the estimated
regression model gives the change in y for
a one-unit change in x2 when x1 is held
constant. Thus, a driver with one extra
driving violation during the past three
years but with the same years of driving
experience is expected to pay $16.106 (or
$16.11) more per month for the auto
insurance premium.

(b) The values of the standard deviation
of errors, the coefficient of multiple
determination, and the adjusted
coefficient of multiple determination are
given in part III of the MINITAB solution
of Screen 14.3. From this part of the
solution,
Se  12.1459, R  93.1%, and R  91.6%

2 2

(c) We substitute x1 = 7 and x2 = 3 in the
estimated regression model. Thus,
y = 110.28 - 2.7473x1 + 16.106x2
= 110.28 - 2.7473(7) + 16.106(3)
= $139.37

(d) We substitute x1 = 12 and x2 = 4 in
the estimated regression model. Thus,
y = 110.28 - 2.7473x1 + 16.106x2
= 110.28 - 2.7473(12) + 16.106(4)
= $141.74

Confidence Interval for an Individual Coefficient
Confidence Interval for Bi
The (1-α) x 100% confidence interval for
Bi is given by
bi  t sbi
The value of t that is used in this formula
is obtained from the t distribution table for
α/2 area in the right tail of the t
distribution curve and (n-k-1) degrees of
freedom. The values of bi and sbi are
obtained from the computer solution.
Example 14-3
Determine a 95% confidence interval for
B1 (the coefficient of experience) for the
multiple regression of auto insurance
premium on driving experience and the
number of driving violations. Use the
MINITAB solution of Screen 14.3.

 To make a confidence interval for B1, we use the
portion marked II in the MINITAB solution of
Screen 14.3.
b1 = -2.7473 and sb1 = .9770
 The confidence level = 95%.
 Area in each tail of the t distribution
= (1 - .95) / 2 = .025
 n = 12 and k = 2
 Degrees of freedom = n - k – 1 = 9
 From the t distribution table (Table V), the value
of t for .025 area in the right tail of the t
distribution curve is 2.262.
 The 95% confidence interval for B1 is
b1 ± t sb1 = -2.7473 ± (2.262)(.9770)
= -2.7473 ± 2.2100
= -4.9573 to -.5373
 We can state with 95% confidence that

for one extra year of driving experience,
the monthly auto insurance premium
changes by an amount between -$4.96
and -$.54.
Test Statistic for bi
The value of the test statistic t for bi is
calculated as
bi  Bi
t 
sbi
The value of Bi is substituted from the
null hypothesis. Usually, but not always,
the null hypothesis is H0: Bi = 0. The
MINITAB solution contains this value of
the t statistic.
Example 14-4
Using the 2.5% significance level, can
you conclude that the coefficient of the
number of years of driving experience in
regression model (3) is negative? Use
the MINITAB output obtained in Example
14–1 and shown in Screen 14.3 to
perform this test.

 From Example 14-1, out regression mode (3) is
y = A + B1 x1 + B2 x2 + ε
 From the MINITAB solution, the estimated
regression equation is
y = 110.28 – 2.7473 x1 + 16.106 x2
 To conduct a test of hypothesis about B1, we use
the portion marked II in the MINITAB solution
given in Screen 14.3.
b1 = -2.7473 and sb1 = .9770

 Step 1:
 H0: B1 = 0 H1: B1 < 0
 Step 2:
 The sample size is small (n < 30)
 σε is not known
 The sampling distribution of b1 is normal

 We use the t distribution to make a test of
hypothesis about B1
 Step 3:
 The significance level = .025
 The < sign in the alternative hypothesis
indicates that the test is left-tailed
 Degree of freedom
df = n – k – 1 = 12 – 2 – 1 = 9
 From the t distribution table (Table V),
the critical value of t for 9 df and .025
area in the left tail is t = -2.262
Figure 14.1

 Step 4:
 The value of the test statistic t for b1 can be
obtained from the MINITAB solution given in
Screen 14.3. Thus, the observed value of t is
bi  Bi
t  2.81
sbi
 p-value = .020 / 2 = .010

 Step 5:
 The value of the test statistic t = - 2.81
 It is less than the critical value t = -2.262
 If falls in the rejection region
 We reject the null hypothesis
 We conclude that the coefficient of x1 in

regression mode (3) is negative.


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CHAPTER 14

Prem Mann, Introductory Statistics, 7/E

Prem Mann, Introductory Statistics, 7/E

Prem Mann, Introductory Statistics, 7/E

Assumption 2: The errors associated with

Prem Mann, Introductory Statistics, 7/E

Assumption 4: There is no linear

Prem Mann, Introductory Statistics, 7/E

The standard deviation of errors (also

Prem Mann, Introductory Statistics, 7/E

Note that here SSE is the error sum of

Prem Mann, Introductory Statistics, 7/E

Prem Mann, Introductory Statistics, 7/E

Another property of R2 to remember is that

Prem Mann, Introductory Statistics, 7/E

Prem Mann, Introductory Statistics, 7/E

Prem Mann, Introductory Statistics, 7/E

Prem Mann, Introductory Statistics, 7/E

Prem Mann, Introductory Statistics, 7/E

Prem Mann, Introductory Statistics, 7/E

We are to estimate the regression model

Enter the given data of Table 14.1 in

Prem Mann, Introductory Statistics, 7/E

From the output given in SPSS, the

We can also use MINITAB to obtain

Prem Mann, Introductory Statistics, 7/E

Prem Mann, Introductory Statistics, 7/E

Prem Mann, Introductory Statistics, 7/E

(a) Explain the meaning of the estimated

Prem Mann, Introductory Statistics, 7/E

Prem Mann, Introductory Statistics, 7/E

Prem Mann, Introductory Statistics, 7/E

Prem Mann, Introductory Statistics, 7/E

Prem Mann, Introductory Statistics, 7/E

Se  12.1459, R  93.1%, and R  91.6%

Prem Mann, Introductory Statistics, 7/E

Prem Mann, Introductory Statistics, 7/E

Prem Mann, Introductory Statistics, 7/E

Prem Mann, Introductory Statistics, 7/E

 We can state with 95% confidence that

Prem Mann, Introductory Statistics, 7/E

Prem Mann, Introductory Statistics, 7/E

 The sampling distribution of b1 is normal

Prem Mann, Introductory Statistics, 7/E

 p-value = .020 / 2 = .010

Prem Mann, Introductory Statistics, 7/E

 We conclude that the coefficient of x1 in

Prem Mann, Introductory Statistics, 7/E

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