Regression Analysis, Residual Analysis and Missing Variables in Regression Models

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Abstract
Regression analysis and residual analysis are discussed. It is inappropriate to analyze the patterns emerging when the residuals are plotted against the observed dependent variable. This is because of an intrinsic correlation between the residuals and the observed dependent variables. We also point out that the only ways to detect a missing variable through residual plots are either through a non-linear trend in the above mentioned residual plot or through a linear or non-linear trend in the plot of residuals plotted against the missing variables. On this basis we point out some earlier errors in the use of residual analysis.

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