Note that you can have several explanatory variables in your analysis—for example,

changes to GDP and inflation in addition to unemployment in explaining stock market

prices. When more than one explanatory variable is used, it is referred to as
multiple linear regression, the model that is the most commonly used tool in
econometrics.

Different Regression Models

Several different regression models exist that are optimized depending on the
nature of the data being analyzed and the type of question being asked. The most
common example is the ordinary least-squares (OLS) regression, which can be
conducted on several types of cross-sectional or time-series data. If you're
interested in a binary (yes-no) outcome—for instance, how likely you are to be
fired from a job based on your productivity—you can use a logistic regression or a
probit model. Today, there are hundreds of models that an econometrician has at his
disposal.

Econometrics is now conducted using statistical analysis software packages designed

for these purposes, such as STATA, SPSS, or R. These software packages can also
easily test for statistical significance to provide support that the empirical
results produced by these models are not merely the result of chance. R-squared, t-
tests, p-values, and null-hypothesis testing are all methods used by
econometricians to evaluate the validity of their model results.

Limitations of Econometrics
Econometrics is sometimes criticized for relying too heavily on the interpretation
of raw data without linking it to established economic theory or looking for causal
mechanisms. It is crucial that the findings revealed in the data are able to be
adequately explained by a theory, even if that means developing your own theory of
the underlying processes.

Regression analysis also does not prove causation, and just because two data sets
show an association, it may be spurious. For example, drowning deaths in swimming
pools increase with GDP. Does a growing economy cause people to drown? Of course
not, but perhaps more people buy pools when the economy is booming. Econometrics is
largely concerned with correlation analysis, and remember, correlation does not
equal causation.

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What Is Stepwise Regression?

Stepwise regression is the step-by-step iterative construction of a regression
model that involves the selection of independent variables to be used in a final
model. It involves adding or removing potential explanatory variables in succession
and testing for statistical significance after each iteration.

The availability of statistical software packages makes stepwise regression

possible, even in models with hundreds of variables.

KEY TAKEAWAYS
Stepwise regression is a method that iteratively examines the statistical
significance of each independent variable in a linear regression model.
The forward selection approach starts with nothing and adds each new variable
incrementally, testing for statistical significance.
The backward elimination method begins with a full model loaded with several
variables and then removes one variable to test its importance relative to overall
results.
Stepwise regression has its downsides, however, as it is an approach that fits data
into a model to achieve the desired result.
Types of Stepwise Regression
The underlying goal of stepwise regression is, through a series of tests (e.g. F-
tests, t-tests) to find a set of independent variables that significantly influence
the dependent variable. This is done with computers through iteration, which is the
process of arriving at results or decisions by going through repeated rounds or
cycles of analysis. Conducting tests automatically with help from statistical
software packages has the advantage of saving time and limiting mistakes.

Stepwise regression can be achieved either by trying out one independent variable
at a time and including it in the regression model if it is statistically
significant or by including all potential independent variables in the model and
eliminating those that are not statistically significant. Some use a combination of
both methods and therefore there are three approaches to stepwise regression: