CODEWITHSUNDEEP
stata
Francisco Roldán
Francisco Roldán

Reputation: 55

How to interpret the constant in an AREG output?

I am running regressions with fixed effects in Stata, using areg, and I just realized its reports a constant term. Allegedly, what areg does is perform a "within" transformation to the data and then run OLS on the transformed data. However, the constant term from the original model is destroyed by the "within" transformation.

Therefore, what does the constant reported by areg mean? Is it a programming mistake? I don't think so, because areg does not allow the -nocons- option, and it would seem that the reason is connected to the meaning of the constant.

Upvotes: 4

Views: 4256

Answers (2)

Eric Wang
Eric Wang

Reputation: 11

As said in the Stata manual: The intercept reported by areg deserves some explanation because, given k mutually exclusive and exhaustive dummies, it is arbitrary. areg identifies the model by choosing the intercept that makes the prediction calculated at the means of the independent variables equal to the mean of the dependent variable: y = xb .

areg does give a different constant than using regress. areg is kind of tricky as it is based on the assumption that the (absorbed) no. of groups will not increase with sample size.

Upvotes: 1

dimitriy
dimitriy

Reputation: 9460

With areg (as well as xtreg with the fe option), the intercept is fit so that y-bar minus x-bar times beta-hat is equal to zero. In other words, Stata calculates an intercept that makes the prediction calculated at the means of the independent variables equal to the mean of the dependent variable.

Upvotes: 2

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