Open AccessThe Pitfalls Of Multiple Dummy Variables In A Regression
Author(s) -
Yi Ren,
Dong Xiao
Publication year - 2012
Publication title -
the review of business information systems
Language(s) - English
Resource type - Journals
eISSN - 2157-9547
pISSN - 1534-665X
DOI - 10.19030/rbis.v16i4.7436
Subject(s) - term (time) , regression analysis , variables , regression , statistics , linear regression , econometrics , variable (mathematics) , interaction , computer science , mathematics , mathematical analysis , physics , quantum mechanics
This study reports long-been-neglected pitfalls when using multiple dummy variables in a regression model. We conduct simulation analysis to explain the mathematical meaning of a product term of two dummy variables, and find that the interaction dummy term indicates only the extra contribution, not the additive contribution of two dummies. The results suggest that testing and estimating interaction effects of dummy variables are not meaningful, and that dummy variable techniques should be handled carefully when introducing two or more dummies in a multiple regression model.