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Correlation Coefficient
Testing the Correlation Coefficient
Simple Linear Regression
Correlation Coefficient
The linear correlation coefficient, denoted by , is a measure of the strength of the
linear relationship existing between two variables, say X and Y, that is independent
of their respective scales of measurement.
Correlation Coefficient
To visualize the possible underlying linear relationship between X and Y, we can plot
individual pairs of observations on a two-dimensional graph called a scatter
diagram.
Correlation Coefficient
Properties:
A linear correlation coefficient can only assume values between -1 and 1,
inclusive of endpoints.
The sign of describes the direction.
A positive value means that the line slopes upward to the right, and so as X
increases, the value of Y increases.
A negative value means that the line slopes downward to the right, and so as X
increases, the value of Y decreases.
Correlation Coefficient
Properties:
When is -1 or 1, there is a perfect linear relationship between X and Y and all
the points (x,y) fall on a straight line. A that is close to -1 or 1 indicates a strong
linear relationship.
A strong linear relationship does not necessarily imply that X causes Y or Y causes
X. It is possible that a third variable may have caused the change in both X and Y,
producing the observed relationship.
Correlation Coefficient
A point estimator of is the Pearson product moment correlation coefficient.
The Pearson product moment correlation coefficient between X and Y, denoted by
r, is defined as:
r=
n
n
n n
X
Y
(
X
)(
i=1 i i
i=1 i
i=1 Yi )
2 (n X )2 )(n n Y2 (n Y )2 )
(n n
X
i=1 i
i=1 i
i=1 i
i=1 i
Correlation Coefficient
r=
n
n
n n
X
Y
(
X
)(
i
i
i
i=1
i=1
i=1 Yi )
2
n
2 )(n n Y2 (n Y )2 )
(n n
X
(
X
)
i=1 i
i=1 i
i=1 i
i=1 i
1
3.5
2
4.5
2
4
2
3.5
3
6.5
3
8
3
6
4
7.9
4
7
x
y
5
9.4
6
9.3
6
11
6
7
7
10.5 12.4 11.5
7
10
8
15
8
11
8
13.7
Answer: 0.9511
3
7
Ha
= o
< o
> o
o
Test Statistic
t=
(r o ) n2
1r2 )
Region of
Rejection
t < t (v = n 2)
t > t (v = n 2)
|t| > t (v = n 2)
2
Example: Use the hypothetical data. Suppose that the linear correlation coefficient
between X and Y in the past is 0.90. We want to determine if the correlation has
significantly increased compared to the past. Test at 5% level of significance.
b1 =
n
n
n n
X
Y
(
X
)(
i
i
i
i=1
i=1
i=1 Yi )
2 (n X )2
n n
X
i=1 i
i=1 i
b0 =
Y b1
X
= b0 + b1 X.
Thus, the estimated regression equation is given by Y
v=n2
v = n2
Sb1 , b1 + t (v = n 2)Sb1 )
2
Sb0 , b0 + t (v = n 2)Sb0 )
2