Linear model

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In statistics, the term linear model is used in different ways according to the context. The most common occurrence is in connection with regression models and the term is often taken as synonymous with linear regression model. However the term is also used in time series analysis with a different meaning. In each case, the designation "linear" is used to identify a subclass of models for which substantial reduction in the complexity of the related statistical theory is possible.

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Linear regression models

For the regression case, the statistical model is as follows. Given a (random) sample  (Y_i, X_{i1}, \ldots, X_{ip}), \, i = 1, \ldots, n the relation between the observations Yi and the independent variables Xij is formulated as

where  \phi_1, \ldots, \phi_p may be nonlinear functions. In the above, the quantities εi are random variables representing errors in the relationship. The "linear" part of the designation relates to the appearance of the regression coefficients, βj in a linear way in the above relationship. Alternatively, one may say that the predicted values corresponding to the above model, namely

are linear functions of the βj.

Given that estimation is undertaken on the basis of a least squares analysis, estimates of the unknown parameters βj are determined by minimising a sum of squares function

From this, it can readily be seen that the "linear" aspect of the model means the following:

  • the function to be minimised is a quadratic function of the βj for which minimisation is a relatively simple problem;
  • the derivatives of the function are linear functions of the βj making it easy to find the minimising values;
  • the minimising values βj are linear functions of the observations Yi;
  • the minimising values βj are linear functions of the random errors εi which makes it relatively easy to determine the statistical properties of the estimated values of βj.

Time series models

An example of a linear time series model is an autoregressive moving average model. Here the model for values {Xt} in a time series can be written in the form

where again the quantities εt are random variables representing innovations which are new random effects that appear at a certain time but make affect values of X at later times. In this instance the use of the term "linear model" refers to structure of the above relationship in representing Xt as a linear function of past values of the same time series and of current and past values of the innovations.[1] This particular aspect of the structure means that it is relative simple to derive relations for the mean and covariance properties of the time series. Note that here the "linear" part of the term "linear model" is not referring to the coefficients φi and θi as it would be in the case of a regression model which looks structurally similar.

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