ORDINAL REGRESSION MODELS

ORDINAL REGRESSION MODELS

Ø In many applications in the social and medical
sciences the discrete response categories are ordered
or ranked.
Ø In labor market studies, workers can work full time, part
time, or not be in the workforce.
Ø Corporate bonds are rated as B, B+, A, A+, A++, each
higher rating denoting higher credit worthiness.
Ø Cannot be treated as interval-scale or ratio-scale
variables.
Ø Cannot say that the difference between full time work and
part time work or between part time work and no work is
the same.
Ø The ratio between any two categories here may not be
practically meaningful.
 ORDERED LOGIT MODEL (OLM)

Ø Estimate
Pr(Yi £ j ) = Pr( B1 X 1i + B2 X 2i + ... + Bk X ki + ui £ a j )
= Pr(ui £ a j - B1 X 1i - B2 X 2i - ... - Bk X ki )

where there are J ordered alternatives, and a1 – a(J-1) represent

cutoffs or threshold parameters.
Ø Gives the (cumulative) probability that Yi falls in a
category j and below.
Ø The slope coefficients of the X regressors are the same in
each category; only their intercepts (cutoffs) differ. That
is why OLM are also known as proportional-odds
models.
 ORDERED LOGIT MODEL (CONT.)
Ø The cumulative probabilities are shown as:
exp(a j - BX )
1 + exp(a j - BX )
Ø And the odds ratio is defined as:
Pr[Yi £ j X ] Pr[Yi £ j X ]
=
Pr[Yi > j X ) Pr[1 - Pr(Yi £ j X )]

Ø We end up with the following ordered logit function:

Pr i (Yi £ j ) Pr(Yi £ j )
logit[Pr(Yi £ j )] = ln = ln
Pr(Yi > j ) [1 - Pr(Yi £ j )]
K
= a j - å Bn X in j = 1, 2, ... , ( J - 1)
n =1
ALTERNATIVES TO PROPORTIONAL ODDS MODEL

Ø Formal Test of Parallel Regression Lines:

Ø The tests, omodel and Brant, developed by Long
and Freese, can be used to test the assumption of
parallel regression lines (easily downloaded in
Stata).
Ø If the assumption of parallel regression lines is
violated, one alternative is to use the multinomial
logit model (MLM) discussed in the previous
chapter or other alternatives.
 Reference

Damodar Gujarati
Econometrics by Example, second edition