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Let's say $x$ is correlated to both $y_1$, and $y_2$. Why are the residuals of the nested regression of $x$ against $y_1$ and $y_2$, not equal to the residuals of the simultaneous (multiple) regression of $x$ against $y_1$ and $y_2$? To clarify:

I take the residuals of the regression of $x$ against $y_1$ to get residuals $r_1$. I regress $r_1$ against $y_2$ to get residuals $r_2$. Why are these residuals $r_2$ not equal to the residuals of the multivariate regression of $x$ against both $y_1$ and $y_2$?

Written in R code, we would say that,

lm(lm(x ~ y1)$residuals ~ y2)$residuals

is not equal to:

lm(x ~ y1 + y2)$residuals

I would like to understand this as would like progressively to extract the influence of explanatory variables from a dependent variable, so that I can "magnify" progressively the dependent variable's correlation to each subsequent factor. I am doing this in the context of PCA regression so specifically:

  • it30 = the 30 year point on the Italian yield curve
  • itpc1 = the first principal component of the Italian yield curve, calculated from maturity points 1y, 2y, 3y, ..., 30y.
  • itpc2 = the second principal component of the Italian yield curve

I expect it30 independently to have a relationship to itpc1 (yield curve level) and itpc2 (yield curve slope). Another fact is that, due to the PCA, itpc1 and itpc2 are orthogonal, but I do not think that is important for this question.

Indeed:

enter image description here

And:

enter image description here

...so the 30y yield curve has a relationship to both itpc1 and itpc2.

Now if I take the residuals of the first regression and regress these against the second variable itpc2, I would expect there to be a relationship, and there does seem to be:

enter image description here

So it appears that my residuals from the first regression are linked to the second variable, as I would expect, that is, after accounting for the first correlation, that is, extracting itpc1 from the data, there is still information related to the correlation with PC2. Interesting so far.

Now I want to extract both itpc1 and itpc2 from it30, but I am wondering which approach to take, because of the following that I do not understand....

My question is, why is this regression not a perfect straight line?

enter image description here

That is, if I progressively extract correlated variables from the dependent variable in a nested way, why are the residuals not equal to the regression which extracts them all in one shot?

My objective is to understand to what extent each principal component affects a series. Yes I know I can do this using the eigenvector matrix but I am interested in the above behaviour of regressions.

Any intuitive explanation accompanying formulas would be appreciated.

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    $\begingroup$ My answer at stats.stackexchange.com/a/46508 addresses this question beginning at the section "Multiple regression can be obtained by sequential matching." The short answer is that you are on to something, but at each step you have to regress all the variables (independent and independent) on the current variable and retain those residuals for the next step. $\endgroup$ – whuber May 12 '14 at 21:17
  • $\begingroup$ So I have to take y2 "out of" y1 before I perform the stepwise regression? IE: lm(lm(x ~ y1)\$residuals ~ lm(y2 ~ y1)\$residuals)\$residuals as my first step? Is that correct? $\endgroup$ – Thomas Browne May 12 '14 at 21:46
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    $\begingroup$ Although you should get the right results, there's some potential for confusion because your regressions are all using two independent variables (one is a constant). Read over the code in my post, especially the take.out function (and its subsequent uses): I think that makes things pretty clear. If not, there is a lot of relevant information in the accompanying scatterplot matrix. BTW, it can be confusing to call this process "stepwise regression," because that term already has a (well-known) different meaning in this context. "Sequential regression" might be a more felicitous choice. $\endgroup$ – whuber May 12 '14 at 21:50
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    $\begingroup$ Understood on "stepwise" thank you. Actually I have now replicated your result perfectly. Moreover, in the above, because y1 and y2 are orthogonal I did not actually need to do the second (y2 ~ y1) regression because of course, lm(y2 ~ y1)$residuals == y2 if they are principal components. My error was that in the above charts, my PCA calculation used cor instead of cov matrices making them non-orthogonal, requiring your correction of my formula. Either way, I am comforted now to have a behaviour that I understand. Will update the post with my own answer shortly, unless you care to go ahead. $\endgroup$ – Thomas Browne May 12 '14 at 21:54
  • $\begingroup$ Thank you for sharing your analysis--well done! I would indeed appreciate seeing your answer posted. $\endgroup$ – whuber May 12 '14 at 22:04
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As per Bill Huber's comments and answer elsewhere, the trick is to remove the influence of the independent variables on each other whenever producing each sequential regression. In other words instead of:

lm(lm(x ~ y1)$residuals ~ y2)

We want:

lm(lm(x ~ y1)$residuals ~ lm(y2 ~ y1)$residuals)

In this case, we DO get back to the multiple regression:

enter image description here

Moreover, we can show the coefficients are the same:

> round(coef(lm(lm(it30 ~ itpc1)$residuals ~ lm(itpc2 ~ itpc1)$residuals)), 5) 
(Intercept) lm(itpc2 ~ itpc1)$residuals  #$
    0.00000                    -0.21846 
> round(coef(lm(lm(it30 ~ itpc2)$residuals ~ lm(itpc1 ~ itpc2)$residuals)), 5) 
(Intercept) lm(itpc1 ~ itpc2)$residuals  #$
    0.00000                     0.29197 
> round(coef(lm(it30 ~ itpc1 + itpc2)), 5)
(Intercept)       itpc1       itpc2 
    0.01186     0.29197    -0.21846 

Interestingly, and as expected, if the independent variables are orthogonal as in PCA regression, then we do not need to take out the influence of each of the regressors against each other. In this case it is true that:

lm(lm(x ~ y1)$residuals ~ y2)$residuals

is perfectly correlated with:

lm(x ~ y1 + y2)$residuals

as can be seen here:

enter image description here

This is because the orthogonal principal components have a zero-slope regression line and thus the residuals are equal to the dependent variable (with a vertical translation to mean=0).

enter image description here

enter image description here

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