Seemingly unrelated regression tree

ABSTRACT

Nonparametric seemingly unrelated regression provides a powerful alternative to parametric seemingly unrelated regression for relaxing the linearity assumption. The existing methods are limited, particularly with sharp changes in the relationship between the predictor variables and the corresponding response variable. We propose a new nonparametric method for seemingly unrelated regression, which adopts a tree-structured regression framework, has satisfiable prediction accuracy and interpretability, no restriction on the inclusion of categorical variables, and is less vulnerable to the curse of dimensionality. Moreover, an important feature is constructing a unified tree-structured model for multivariate data, even though the predictor variables corresponding to the response variable are entirely different. This unified model can offer revelatory insights such as underlying economic meaning. We propose the key factors of tree-structured regression, which are an impurity function detecting complex nonlinear relationships between the predictor variables and the response variable, split rule selection with negligible selection bias, and tree size determination solving underfitting and overfitting problems. We demonstrate our proposed method using simulated data and illustrate it using data from the Korea stock exchange sector indices.

KEYWORDS:

• Regression tree
• seemingly unrelated regression
• selection bias
• nonparametric method

Disclosure statement

No potential conflict of interest was reported by the authors.

ORCID

HyungJun Cho http://orcid.org/0000-0003-0844-9948

Additional information

Funding

This research was supported by the Basic Science Research Program through the National Research Foundation of Korea (NRF) funded by the Ministry of Education, Science, and Technology (NRF-2015R1D1A1A09058602).