Introduction to Categorical Variables
Summary
They arise anytime we have observations that fall into discrete groups, rather than on a continuous scale. Whatever the case, in order to capture the impacts we are interested in, categorical variables require special treatment before being used in estimation. The most common method for including categorical data in regressions is to create dummy variables for each possible category. Example: Using categorical variables in ordinary least squares Lets estimate our linear regression MPG model from earlier. Using our categorical variable with is easy and requires no extra steps: There are a few notable components to our linear regression results: • The estimated coefficient on the level is .
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