Assignment 1. Regression model estimation

Equipo:

A00834241 | Regina Rodríguez Chávez

A00833617 | Yessica Acosta Blancheth

A01275763 | Eli Gabriel Hernández Medina

A00833172 | Genaro Rodríguez Alcántara

Primero que nada, debemos de cargar todas las librerías necesarias para el siguiente ejercicio:

library(foreign)
library(dplyr)        # data manipulation 

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library(forcats)      # to work with categorical variables
library(ggplot2)      # data visualization 
library(readr)        # read specific csv files
library(janitor)      # data exploration and cleaning 

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library(Hmisc)        # several useful functions for data analysis 

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library(psych)        # functions for multivariate analysis 

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library(naniar)       # summaries and visualization of missing values NA's
library(dlookr)       # summaries and visualization of missing values NA's

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library(corrplot)     # correlation plots

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library(jtools)       # presentation of regression analysis 

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library(lmtest)       # diagnostic checks - linear regression analysis 

## Loading required package: zoo

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library(car)          # diagnostic checks - linear regression analysis

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library(olsrr)        # diagnostic checks - linear regression analysis 

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library(naniar)       # identifying missing values
#library(funModeling)  # create frequency tables
library(stargazer)    # create publication quality tables

## 
## Please cite as:

##  Hlavac, Marek (2022). stargazer: Well-Formatted Regression and Summary Statistics Tables.

##  R package version 5.2.3. https://CRAN.R-project.org/package=stargazer

library(effects)      # displays for linear and other regression models

## Registered S3 method overwritten by 'survey':
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library(tidyverse)    # collection of R packages designed for data scienc

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library(caret)        # Classification and Regression Training 

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library(glmnet)  

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library(ggplot2)
library(car)
library(lmtest)

library(foreign) library(dplyr) # data manipulation library(forcats) # to work with categorical variables install.packages(“ggplot2) library(ggplot2) # data visualization library(readr) # read specific csv files library(janitor) # data exploration and cleaning library(Hmisc) # several useful functions for data analysis library(psych) # functions for multivariate analysis library(naniar) # summaries and visualization of missing values NA’s library(dlookr) # summaries and visualization of missing values NA’s library(corrplot) # correlation plots library(jtools) # presentation of regression analysis library(lmtest) # diagnostic checks - linear regression analysis library(car) # diagnostic checks - linear regression analysis library(olsrr) # diagnostic checks - linear regression analysis library(naniar) # identifying missing values library(funModeling) # create frequency tables library(stargazer) # create publication quality tables library(effects) # displays for linear and other regression models library(tidyverse) # collection of R packages designed for data scienc library(caret) # Classification and Regression Training library(glmnet)
library(ggplot2)

En caso de no contar con las librerías instaladas, primer es necesarios instalarlas para después leerlas.

Carguemos nuestra base de datos

#file.choose()
dataset <- read.csv("/Users/genarorodriguezalcantara/Desktop/Tec/Introduction to econometrics/real_estate_data.csv")

a. Exploratory Data Analysis

- Identify missing values

- Display the structure of the dataset

- Include descriptive statistics (mean, median, standard deviation, minimum, maximum)

- Transform variables if required

##A()
#Identifiquemos los datos faltantes:
#is.na(dataset)
sum(is.na(dataset))   

## [1] 0

#gg_miss_var(dataset) 

#Mostremos la estructura de la base de datos:
str(dataset)

## 'data.frame':    506 obs. of  15 variables:
##  $ medv   : num  24 21.6 34.7 33.4 36.2 28.7 22.9 27.1 16.5 18.9 ...
##  $ cmedv  : num  24 21.6 34.7 33.4 36.2 28.7 22.9 22.1 16.5 18.9 ...
##  $ crim   : num  0.00632 0.02731 0.02729 0.03237 0.06905 ...
##  $ zn     : num  18 0 0 0 0 0 12.5 12.5 12.5 12.5 ...
##  $ indus  : num  2.31 7.07 7.07 2.18 2.18 2.18 7.87 7.87 7.87 7.87 ...
##  $ chas   : int  0 0 0 0 0 0 0 0 0 0 ...
##  $ nox    : num  0.538 0.469 0.469 0.458 0.458 0.458 0.524 0.524 0.524 0.524 ...
##  $ rm     : num  6.58 6.42 7.18 7 7.15 ...
##  $ age    : num  65.2 78.9 61.1 45.8 54.2 58.7 66.6 96.1 100 85.9 ...
##  $ dis    : num  4.09 4.97 4.97 6.06 6.06 ...
##  $ rad    : int  1 2 2 3 3 3 5 5 5 5 ...
##  $ tax    : int  296 242 242 222 222 222 311 311 311 311 ...
##  $ ptratio: num  15.3 17.8 17.8 18.7 18.7 18.7 15.2 15.2 15.2 15.2 ...
##  $ b      : num  397 397 393 395 397 ...
##  $ lstat  : num  4.98 9.14 4.03 2.94 5.33 ...

#Complementamos con un análisis descriptivo:
summary(dataset)

##       medv           cmedv            crim                zn        
##  Min.   : 5.00   Min.   : 5.00   Min.   : 0.00632   Min.   :  0.00  
##  1st Qu.:17.02   1st Qu.:17.02   1st Qu.: 0.08205   1st Qu.:  0.00  
##  Median :21.20   Median :21.20   Median : 0.25651   Median :  0.00  
##  Mean   :22.53   Mean   :22.53   Mean   : 3.61352   Mean   : 11.36  
##  3rd Qu.:25.00   3rd Qu.:25.00   3rd Qu.: 3.67708   3rd Qu.: 12.50  
##  Max.   :50.00   Max.   :50.00   Max.   :88.97620   Max.   :100.00  
##      indus            chas              nox               rm       
##  Min.   : 0.46   Min.   :0.00000   Min.   :0.3850   Min.   :3.561  
##  1st Qu.: 5.19   1st Qu.:0.00000   1st Qu.:0.4490   1st Qu.:5.886  
##  Median : 9.69   Median :0.00000   Median :0.5380   Median :6.208  
##  Mean   :11.14   Mean   :0.06917   Mean   :0.5547   Mean   :6.285  
##  3rd Qu.:18.10   3rd Qu.:0.00000   3rd Qu.:0.6240   3rd Qu.:6.623  
##  Max.   :27.74   Max.   :1.00000   Max.   :0.8710   Max.   :8.780  
##       age              dis              rad              tax       
##  Min.   :  2.90   Min.   : 1.130   Min.   : 1.000   Min.   :187.0  
##  1st Qu.: 45.02   1st Qu.: 2.100   1st Qu.: 4.000   1st Qu.:279.0  
##  Median : 77.50   Median : 3.207   Median : 5.000   Median :330.0  
##  Mean   : 68.57   Mean   : 3.795   Mean   : 9.549   Mean   :408.2  
##  3rd Qu.: 94.08   3rd Qu.: 5.188   3rd Qu.:24.000   3rd Qu.:666.0  
##  Max.   :100.00   Max.   :12.127   Max.   :24.000   Max.   :711.0  
##     ptratio            b              lstat      
##  Min.   :12.60   Min.   :  0.32   Min.   : 1.73  
##  1st Qu.:17.40   1st Qu.:375.38   1st Qu.: 6.95  
##  Median :19.05   Median :391.44   Median :11.36  
##  Mean   :18.46   Mean   :356.67   Mean   :12.65  
##  3rd Qu.:20.20   3rd Qu.:396.23   3rd Qu.:16.95  
##  Max.   :22.00   Max.   :396.90   Max.   :37.97

statistics_dt <- summary(dataset)

#Extraemos las estadísticas deseadas
mean_value <- statistics_dt[2, ]
median_value <- statistics_dt[3, ]
standard_deviation <- statistics_dt[4, ]
minimum_value <- statistics_dt[5, ]
maximum_value <- statistics_dt[6, ]

# Print the descriptive statistics
cat("Mean:", mean_value, "\n")

## Mean: 1st Qu.:17.02   1st Qu.:17.02   1st Qu.: 0.08205   1st Qu.:  0.00   1st Qu.: 5.19   1st Qu.:0.00000   1st Qu.:0.4490   1st Qu.:5.886   1st Qu.: 45.02   1st Qu.: 2.100   1st Qu.: 4.000   1st Qu.:279.0   1st Qu.:17.40   1st Qu.:375.38   1st Qu.: 6.95

cat("Median:", median_value, "\n")

## Median: Median :21.20   Median :21.20   Median : 0.25651   Median :  0.00   Median : 9.69   Median :0.00000   Median :0.5380   Median :6.208   Median : 77.50   Median : 3.207   Median : 5.000   Median :330.0   Median :19.05   Median :391.44   Median :11.36

cat("Standard Deviation:", standard_deviation, "\n")

## Standard Deviation: Mean   :22.53   Mean   :22.53   Mean   : 3.61352   Mean   : 11.36   Mean   :11.14   Mean   :0.06917   Mean   :0.5547   Mean   :6.285   Mean   : 68.57   Mean   : 3.795   Mean   : 9.549   Mean   :408.2   Mean   :18.46   Mean   :356.67   Mean   :12.65

cat("Minimum:", minimum_value, "\n")

## Minimum: 3rd Qu.:25.00   3rd Qu.:25.00   3rd Qu.: 3.67708   3rd Qu.: 12.50   3rd Qu.:18.10   3rd Qu.:0.00000   3rd Qu.:0.6240   3rd Qu.:6.623   3rd Qu.: 94.08   3rd Qu.: 5.188   3rd Qu.:24.000   3rd Qu.:666.0   3rd Qu.:20.20   3rd Qu.:396.23   3rd Qu.:16.95

cat("Maximum:", maximum_value, "\n")

## Maximum: Max.   :50.00   Max.   :50.00   Max.   :88.97620   Max.   :100.00   Max.   :27.74   Max.   :1.00000   Max.   :0.8710   Max.   :8.780   Max.   :100.00   Max.   :12.127   Max.   :24.000   Max.   :711.0   Max.   :22.00   Max.   :396.90   Max.   :37.97

b. Data Visualization

- Build at least 2 pair-wised graphs between the dependent variable and independent variables

- Display a histogram of dependent variable

- Display a correlation plot

#b()
#Pair-Wised Graphs

#1
ggplot(data = dataset, aes(x = medv, y = rm)) +
  geom_point() +
  labs(x = "medv", y = "Dependent Variable") +
  ggtitle("Scatter Plot: Median Value (medv) vs. Rooms (rm)")

#2
ggplot(data = dataset, aes(x = medv, y = lstat)) +
  geom_point() +
  labs(x = "Median Value (medv)", y = "Percentage of lower status (lstat)") +
  ggtitle("Scatter Plot: Median Value (medv) vs. Percentage of lower status (lstat)")

#Histograma de variable dependiente
hist(dataset$medv)

#Correlation plot
dataset_cor1 <- dataset %>% select(-chas, -rad)
summary(dataset_cor1)

##       medv           cmedv            crim                zn        
##  Min.   : 5.00   Min.   : 5.00   Min.   : 0.00632   Min.   :  0.00  
##  1st Qu.:17.02   1st Qu.:17.02   1st Qu.: 0.08205   1st Qu.:  0.00  
##  Median :21.20   Median :21.20   Median : 0.25651   Median :  0.00  
##  Mean   :22.53   Mean   :22.53   Mean   : 3.61352   Mean   : 11.36  
##  3rd Qu.:25.00   3rd Qu.:25.00   3rd Qu.: 3.67708   3rd Qu.: 12.50  
##  Max.   :50.00   Max.   :50.00   Max.   :88.97620   Max.   :100.00  
##      indus            nox               rm             age        
##  Min.   : 0.46   Min.   :0.3850   Min.   :3.561   Min.   :  2.90  
##  1st Qu.: 5.19   1st Qu.:0.4490   1st Qu.:5.886   1st Qu.: 45.02  
##  Median : 9.69   Median :0.5380   Median :6.208   Median : 77.50  
##  Mean   :11.14   Mean   :0.5547   Mean   :6.285   Mean   : 68.57  
##  3rd Qu.:18.10   3rd Qu.:0.6240   3rd Qu.:6.623   3rd Qu.: 94.08  
##  Max.   :27.74   Max.   :0.8710   Max.   :8.780   Max.   :100.00  
##       dis              tax           ptratio            b         
##  Min.   : 1.130   Min.   :187.0   Min.   :12.60   Min.   :  0.32  
##  1st Qu.: 2.100   1st Qu.:279.0   1st Qu.:17.40   1st Qu.:375.38  
##  Median : 3.207   Median :330.0   Median :19.05   Median :391.44  
##  Mean   : 3.795   Mean   :408.2   Mean   :18.46   Mean   :356.67  
##  3rd Qu.: 5.188   3rd Qu.:666.0   3rd Qu.:20.20   3rd Qu.:396.23  
##  Max.   :12.127   Max.   :711.0   Max.   :22.00   Max.   :396.90  
##      lstat      
##  Min.   : 1.73  
##  1st Qu.: 6.95  
##  Median :11.36  
##  Mean   :12.65  
##  3rd Qu.:16.95  
##  Max.   :37.97

corrplot(cor(dataset_cor1),type = "upper",order = "hclust",addCoef.col = "black")

c. Hypotheses Statement

- Briefly describe at least 3 hypotheses which you would like to explore through regression analysis

Hipothesis 1: Hypothesis on Air Quality and Housing Value:

• H0: There is no significant association between nitric oxide concentration (nitric_oxid) and the median value of owner-occupied homes (median_value).
• H1: There is a significant negative association between nitric oxide concentration in the air and the median value of owner-occupied homes.

Hipothesis 2: Hypothesis on Highway Accessibility and Housing

• H0: There is no significant association between the index of accessibility to radial highways (access_to_highways) and the median value of owner-occupied homes (median_value).
• H1: There is a significant positive association between the index of accessibility to radial highways and the median value of owner-occupied homes.

Hipothesis 3: Hypothesis on Education and Housing Value:

• H0: There is no significant association between the school pupil-teacher ratio (school) in a town and the median value of owner-occupied homes (median_value).
• H1: There is a significant positive association between the school pupil-teacher ratio in a town and the median value of owner-occupied homes.

Hipothesis 4: Hypothesis on Lower Status Population and Housing

• H0: There is no correlation between the percentage of lower status of the population (low_status_pop) and the median value of owner-occupied homes (median_value).
• H1: There is a negative correlation between the percentage of lower status of the population and the median value of owner-occupied homes. Areas with a higher percentage of lower status population have lower median home values.

Hipothesis 5: Hypothesis on Number of Rooms and Housing

• H0: There is no correlation between the average number of rooms per dwelling (rooms) and the median value of owner-occupied homes (median_value).
• H1: There is a positive correlation between the average number of rooms per dwelling and the median value of owner-occupied homes. Larger homes with more rooms have higher median values.

d. Regression Analysis

- Estimate 3 different linear regression models by using:

• multiple linear regression

• polynomial – multiple linear regression

• lasso regression model

• ridge regression model

- Show the level of accuracy for each linear regression model

# Multiple Linear Regression Analysis 
dmodel1<-lm(medv ~ rm+nox+lstat+crim+tax+indus,data=dataset_cor1)
summary(dmodel1)

## 
## Call:
## lm(formula = medv ~ rm + nox + lstat + crim + tax + indus, data = dataset_cor1)
## 
## Residuals:
##     Min      1Q  Median      3Q     Max 
## -16.782  -3.553  -1.137   1.765  30.464 
## 
## Coefficients:
##              Estimate Std. Error t value Pr(>|t|)    
## (Intercept) -2.481981   3.299447  -0.752  0.45226    
## rm           5.213899   0.444913  11.719  < 2e-16 ***
## nox          3.850583   3.474274   1.108  0.26826    
## lstat       -0.560857   0.053869 -10.412  < 2e-16 ***
## crim        -0.059567   0.035764  -1.666  0.09643 .  
## tax         -0.006609   0.002392  -2.763  0.00593 ** 
## indus        0.010882   0.063367   0.172  0.86372    
## ---
## Signif. codes:  0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1
## 
## Residual standard error: 5.459 on 499 degrees of freedom
## Multiple R-squared:  0.6519, Adjusted R-squared:  0.6477 
## F-statistic: 155.8 on 6 and 499 DF,  p-value: < 2.2e-16

dmodel2<-lm(log(medv) ~ rm+nox+lstat+crim+tax+indus,data=dataset_cor1)
summary(dmodel2)

## 
## Call:
## lm(formula = log(medv) ~ rm + nox + lstat + crim + tax + indus, 
##     data = dataset_cor1)
## 
## Residuals:
##      Min       1Q   Median       3Q      Max 
## -0.74079 -0.13175 -0.01677  0.10572  0.93981 
## 
## Coefficients:
##               Estimate Std. Error t value Pr(>|t|)    
## (Intercept)  2.626e+00  1.305e-01  20.118  < 2e-16 ***
## rm           1.432e-01  1.760e-02   8.136 3.26e-15 ***
## nox          5.965e-02  1.374e-01   0.434 0.664477    
## lstat       -3.031e-02  2.131e-03 -14.223  < 2e-16 ***
## crim        -8.308e-03  1.415e-03  -5.872 7.87e-09 ***
## tax         -3.153e-04  9.461e-05  -3.332 0.000926 ***
## indus        1.576e-03  2.507e-03   0.629 0.529846    
## ---
## Signif. codes:  0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1
## 
## Residual standard error: 0.216 on 499 degrees of freedom
## Multiple R-squared:  0.7242, Adjusted R-squared:  0.7209 
## F-statistic: 218.4 on 6 and 499 DF,  p-value: < 2.2e-16

dmodel3<-lm(log(medv) ~ cmedv+(cmedv^2)+nox+rm+nox+lstat+crim,data=dataset_cor1)
summary(dmodel3) #STAR

## 
## Call:
## lm(formula = log(medv) ~ cmedv + (cmedv^2) + nox + rm + nox + 
##     lstat + crim, data = dataset_cor1)
## 
## Residuals:
##      Min       1Q   Median       3Q      Max 
## -0.51105 -0.02841  0.00692  0.04302  0.39759 
## 
## Coefficients:
##               Estimate Std. Error t value Pr(>|t|)    
## (Intercept)  2.7011883  0.0557313  48.468  < 2e-16 ***
## cmedv        0.0361864  0.0007583  47.720  < 2e-16 ***
## nox         -0.0862931  0.0452409  -1.907    0.057 .  
## rm          -0.0453519  0.0084520  -5.366 1.23e-07 ***
## lstat       -0.0098867  0.0010037  -9.850  < 2e-16 ***
## crim        -0.0066225  0.0005573 -11.883  < 2e-16 ***
## ---
## Signif. codes:  0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1
## 
## Residual standard error: 0.09261 on 500 degrees of freedom
## Multiple R-squared:  0.9492, Adjusted R-squared:  0.9487 
## F-statistic:  1868 on 5 and 500 DF,  p-value: < 2.2e-16

### Diagnostic Tests
library(car)
library(lmtest)

# Model 1:
vif(dmodel1)

##       rm      nox    lstat     crim      tax    indus 
## 1.656208 2.746972 2.507990 1.603871 2.753383 3.202960

bptest(dmodel1)

## 
##  studentized Breusch-Pagan test
## 
## data:  dmodel1
## BP = 33.193, df = 6, p-value = 9.628e-06

AIC(dmodel1)

## [1] 3162.478

# Model 2:
vif(dmodel2)

##       rm      nox    lstat     crim      tax    indus 
## 1.656208 2.746972 2.507990 1.603871 2.753383 3.202960

bptest(dmodel2)

## 
##  studentized Breusch-Pagan test
## 
## data:  dmodel2
## BP = 48.152, df = 6, p-value = 1.102e-08

AIC(dmodel2)

## [1] -106.17

# Model 3:
vif(dmodel3)

##    cmedv      nox       rm    lstat     crim 
## 2.854814 1.618314 2.076620 3.024992 1.353156

bptest(dmodel3)

## 
##  studentized Breusch-Pagan test
## 
## data:  dmodel3
## BP = 95.83, df = 5, p-value < 2.2e-16

AIC(dmodel3)

## [1] -964.0089

#Polynomial - Multiple linear regression
dmodel4 <- lm(log(medv) ~ rm + lstat + I(lstat^2) + indus + I(indus^3) + tax, data = dataset)
summary(dmodel4)

## 
## Call:
## lm(formula = log(medv) ~ rm + lstat + I(lstat^2) + indus + I(indus^3) + 
##     tax, data = dataset)
## 
## Residuals:
##      Min       1Q   Median       3Q      Max 
## -0.88145 -0.12352 -0.00767  0.11651  0.90151 
## 
## Coefficients:
##               Estimate Std. Error t value Pr(>|t|)    
## (Intercept)  3.055e+00  1.364e-01  22.407  < 2e-16 ***
## rm           1.186e-01  1.787e-02   6.636 8.42e-11 ***
## lstat       -6.316e-02  5.736e-03 -11.011  < 2e-16 ***
## I(lstat^2)   8.763e-04  1.548e-04   5.661 2.54e-08 ***
## indus        6.401e-03  4.425e-03   1.446    0.149    
## I(indus^3)  -1.494e-06  6.348e-06  -0.235    0.814    
## tax         -5.361e-04  8.689e-05  -6.169 1.42e-09 ***
## ---
## Signif. codes:  0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1
## 
## Residual standard error: 0.2164 on 499 degrees of freedom
## Multiple R-squared:  0.723,  Adjusted R-squared:  0.7197 
## F-statistic: 217.1 on 6 and 499 DF,  p-value: < 2.2e-16

vif(dmodel4)

##         rm      lstat I(lstat^2)      indus I(indus^3)        tax 
##   1.700761  18.090760  14.398831   9.938230   6.686220   2.312533

bptest(dmodel4)

## 
##  studentized Breusch-Pagan test
## 
## data:  dmodel4
## BP = 66.714, df = 6, p-value = 1.926e-12

AIC(dmodel4)

## [1] -104.0672

# Detect Heteroscedasticity 
boxplot(formula=medv ~ rm, data=dataset_cor1, col=cm.colors(3))

boxplot(formula=medv ~ nox, data=dataset_cor1, col=cm.colors(3))

boxplot(formula=medv ~ lstat, data=dataset_cor1, col=cm.colors(3))

boxplot(formula=medv ~ crim, data=dataset_cor1, col=cm.colors(3))

boxplot(formula=medv ~ cmedv, data=dataset_cor1, col=cm.colors(3))

#_______________

### Split the Data in Training Data vs Test Data
# Lets randomly split the data into train and test set
library(caret)

set.seed(123)                                  ### sets the random seed for reproducibility of results
training.samples<-dataset_cor1$medv %>%
  createDataPartition(p=0.75,list=FALSE)       ### Lets consider 75% of the data to build a predictive model

# Model Accuracy
# RMSE - Root Mean Square Error: The larger the difference indicates a larger gap between the predicted and observed values, 
# which means poor regression model fit. In the same way, the smaller RMSE that indicates the better the model.
train.data<-dataset_cor1[training.samples, ]  ### training data to fit the linear regression model 
test.data<-dataset_cor1[-training.samples, ]  ### testing data to test the linear regression model         

selected_model<-lm(log(medv) ~ rm+nox+lstat+crim,data=test.data)
summary(selected_model)

## 
## Call:
## lm(formula = log(medv) ~ rm + nox + lstat + crim, data = test.data)
## 
## Residuals:
##      Min       1Q   Median       3Q      Max 
## -0.64115 -0.16352 -0.03409  0.10367  0.83148 
## 
## Coefficients:
##              Estimate Std. Error t value Pr(>|t|)    
## (Intercept)  2.388632   0.325050   7.349 2.67e-11 ***
## rm           0.168362   0.042596   3.953 0.000131 ***
## nox          0.173243   0.233199   0.743 0.458994    
## lstat       -0.034048   0.004417  -7.708 4.10e-12 ***
## crim        -0.013377   0.002809  -4.762 5.42e-06 ***
## ---
## Signif. codes:  0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1
## 
## Residual standard error: 0.2586 on 120 degrees of freedom
## Multiple R-squared:  0.6859, Adjusted R-squared:  0.6755 
## F-statistic: 65.52 on 4 and 120 DF,  p-value: < 2.2e-16

RMSE(selected_model$fitted.values,test.data$medv) ### Root Mean Square 

## [1] 23.06438

### Split the Data in Training Data vs Test Data
# Lets randomly split the data into train and test set
set.seed(123)                                  ### sets the random seed for reproducibility of results
training.samples<-dataset_cor1$medv %>%
  createDataPartition(p=0.75,list=FALSE)       ### Lets consider 75% of the data to build a predictive model



#################################
### LASSO REGRESSION ANALYSIS ###
#################################

# LASSO regression via glmnet package can only take numerical observations. Then, the dataset is transformed to model.matrix() format. 
# Independent variables
x<-model.matrix(log(medv) ~ rm+nox+lstat+crim,train.data)[,-1] ### OLS model specification
# x<-model.matrix(Weekly_Sales~.,train.data)[,-1] ### matrix of independent variables X's
y<-train.data$medv ### dependent variable 

# In estimating LASSO regression it is important to define the lambda that minimizes the prediction error rate. 
# Cross-validation ensures that every data / observation from the original dataset (datains) has a chance of appearing in train and test datasets.
# Find the best lambda using cross-validation.
set.seed(123) 
cv.lasso<-cv.glmnet(x,y,alpha=1) # alpha = 1 for LASSO

# Display the best lambda value
cv.lasso$lambda.min                      ### lambda: a numeric value defining the amount of shrinkage. Why min? the higher the value of ?? , the more penalization there is

## [1] 0.03545468

# Fit the final model on the training data
lassomodel<-glmnet(x,y,alpha=1,lambda=cv.lasso$lambda.min)

# Display regression coefficients
coef(lassomodel)

## 5 x 1 sparse Matrix of class "dgCMatrix"
##                      s0
## (Intercept) -0.17268014
## rm           4.94801372
## nox         -3.54323664
## lstat       -0.51037898
## crim        -0.09951622

# Make predictions on the test data
x.test<-model.matrix(log(medv) ~ rm+nox+lstat+crim,test.data)[,-1] ### OLS model specification
# x.test<-model.matrix(Weekly_Sales~.,test.data)[,-1]
lassopredictions <- lassomodel %>% predict(x.test) %>% as.vector()

# Model Accuracy
data.frame(
  RMSE = RMSE(lassopredictions, test.data$medv),
  Rsquare = R2(lassopredictions, test.data$medv))

##       RMSE   Rsquare
## 1 7.198582 0.5994947

### visualizing lasso regression results 
lbs_fun <- function(fit, offset_x=1, ...) {
  L <- length(fit$lambda)
  x <- log(fit$lambda[L])+ offset_x
  y <- fit$beta[, L]
  labs <- names(y)
  text(x, y, labels=labs, ...)
}

lasso<-glmnet(scale(x),y,alpha=1)

plot(lasso,xvar="lambda",label=T)
lbs_fun(lasso)
abline(v=cv.lasso$lambda.min,col="red",lty=2)
abline(v=cv.lasso$lambda.1se,col="blue",lty=2)

#################################
### RIDGE REGRESSION ANALYSIS ###
#################################

# Find the best lambda using cross-validation
set.seed(123)                           # x: independent variables | y: dependent variable 
cv.ridge <- cv.glmnet(x,y,alpha=0.1)      # alpha = 0 for RIDGE

# Display the best lambda value
cv.ridge$lambda.min                     # lambda: a numeric value defining the amount of shrinkage. Why min? the higher the value of ?? , the more penalization there is

## [1] 0.3230498

# Fit the final model on the training data
ridgemodel<-glmnet(x,y,alpha=0,lambda=cv.ridge$lambda.min)

# Display regression coefficients
coef(ridgemodel)

## 5 x 1 sparse Matrix of class "dgCMatrix"
##                     s0
## (Intercept)  0.4190616
## rm           4.8925589
## nox         -4.4568886
## lstat       -0.4884040
## crim        -0.1045264

# Make predictions on the test data
x.test<-model.matrix(log(medv) ~ rm+nox+lstat+crim,test.data)[,-1]
ridgepredictions<-ridgemodel %>% predict(x.test) %>% as.vector()

# Model Accuracy
data.frame(
  RMSE = RMSE(ridgepredictions, test.data$medv),
  Rsquare = R2(ridgepredictions, test.data$medv)
)

##       RMSE   Rsquare
## 1 7.241001 0.5966794

### visualizing ridge regression results 

ridge<-glmnet(scale(x),y,alpha=0)

plot(ridge, xvar = "lambda", label=T)
lbs_fun(ridge)
abline(v=cv.ridge$lambda.min, col = "red", lty=2)
abline(v=cv.ridge$lambda.1se, col="blue", lty=2)

tab <- matrix(c(17587,6324,6322,0.77,0.71,0.71), ncol=2, byrow=FALSE)
colnames(tab) <- c('RMSE','R2')
rownames(tab) <- c('Linear Regression','Lasso','Ridge')
tab <- as.table(tab)

e. Results Discussion

- Briefly explain how linear regression analysis can contribute to improve predictive analytics

- Feel free to use and cite external references

Intepretación, comparación y selección de modelo

Para comparar los resultados y elegir el mejor modelo de regresión que se ajuste a los datos, analicemos las dos opciones proporcionadas. La opción 1 utiliza la regresión Ridge. En esta opción, el mejor valor lambda (la cantidad de contracción) se determina utilizando la validación cruzada. El valor lambda es de 0,3230498. El modelo final se ajusta utilizando este valor lambda y se muestran los coeficientes de regresión. La precisión del modelo se evalúa mediante los valores RMSE (error cuadrático medio) y R-cuadrado. En este caso, el RMSE es de 7,241001 y el valor R-cuadrado es de 0,5966794.

La opción 2 es utilizar la regresión lineal. La fórmula del modelo incluye varias variables como cmedv, nox, rm, lstat y crim. Se muestran los coeficientes, los errores estándar, los valores t y los valores p de cada variable. La precisión del modelo se evalúa mediante el error estándar residual, R-cuadrado múltiple, R-cuadrado ajustado y F-estadístico. En este caso, el error estándar residual es de 0,09261, el R-cuadrado múltiple es de 0,9492 y el R-cuadrado ajustado es de 0,9487.

Para elegir el mejor modelo, hay que tener en cuenta varios factores, como la precisión del modelo, su interpretabilidad y los requisitos específicos del problema en cuestión. Ambas opciones tienen sus puntos fuertes y débiles.

La opción 1 (regresión Ridge) proporciona un valor RMSE más bajo que la opción 2 (regresión lineal). Sin embargo, el valor R-cuadrado de la Opción 1 es 0,5966794, lo que indica que el modelo sólo explica aproximadamente el 59,67% de la varianza de los datos. Por otra parte, la Opción 2 (Regresión lineal) tiene un valor R-cuadrado más alto de 0,9492, lo que sugiere que el modelo explica aproximadamente el 94,92% de la varianza de los datos. Además, la Opción 2 proporciona valores p para cada coeficiente, lo que nos permite evaluar la significación estadística de las variables. Esto puede ser útil para interpretar el impacto de cada variable en la variable objetivo.

Teniendo en cuenta el mayor valor R-cuadrado y la posibilidad de evaluar la significación estadística de las variables, la opción 2 (regresión lineal) parece ajustarse mejor a los datos. Sin embargo, es importante señalar que la decisión final debe basarse en los requisitos específicos y el contexto del problema que se intenta resolver.