Poisson Regression

A presentation by Jeffry A. Jacob

Fall 2002
Eco 6375

Poisson Distribution
A Poisson distribution is given by:
Pr[Y y ]

e y
y!

, y 0,1,2..

Where, is the average number of occurrences in

a specified interval
Assumptions:
Independence
Prob. of occurrence In a short interval is proportional
to the length of the interval
Prob. of another occurrence in such a short interval is
zero

Poisson Model

The dependent variable is a count variable taking

small values (less than 100).
It has been proposed that the count dependent
variable follows a Poisson process whose
parameters are determined by the exogenous
variables and the coefficients
Justified when the variable considered describes
the number of occurrences of an event in a give
time span eg. # of job-related accidents=f(factory
charact.), ship damage=f(type, yr.con., pd.op.)

Specification of the Model

The primary equation of the model is
ei iyi
Pr[Yi yi ]
, yi 0,1,2..
yi !

The most common formulation of this model is the

log-linear specification:

ln i x
'
i

The expected number of events per period is given

by
'

E[ yi | xi ] i e

xi

Specification.
Thus:

E[ yi | xi ]
i i
xi

The major assumption of the Poisson model is :

E[ yi | xi ] i e

xi'

Var [ yi | xi ]

Later on when we do diagnostic testing, we

will test this assumption. It is called testing for
over-dispersion (if Var[y]>E[y]) or underdispersion (if Var[y]<E[y])

Estimation
We estimate the model using MLE. The
Likelihood function is non linear:
n

ln L [i y x ln y i !] [e
i 1

'
i i

i 1

x i'

yi xi' ln yi !]

The parameters of this equation can be estimated

using maximum likelihood method
n
'
L
[x i [e xi y i ]] 0

i 1

Note that the log-likelihood function is concave in

and has a unique maxima. (Gourieroux[1991])

Estimation.
The Hessian of this function is:
n
L2
x i'
'
H
[ x i x i e ]
'
i 1

From this, we can get the asymptotic variancecovariance matrix of the ML estimator:

'
var asy ( ) [ [ x i' x i e xi ]] 1

i 1

Finally, we use the Newton-Raphson iteration to

find the parameter estimates:
( i 1 ) ( i ) H 1 ( i ) g ( i )

Interpretation of the coefficients

Once we obtain the parameter estimates, i.e.
estimates , we can calculate the conditional mean:

i e

x i'

Which gives us the expected number of

events
per period.
log of an economic variable,
Further, if xik is the

i.e. xik = logXki, ik can be interpreted as an elasticity

log E[ yi ]

ik
log X ik

Diagnostic Testing
As we had mentioned before, a major assumption
of the Poisson model is:
E[ yi | xi ] i e 'x Var [ yi | xi ]
i

Here the diagnostic tests are concerned with

checking for this assumption
1. Cameron and Trivedi (1990) test
H0 : Var (yi) = i
ior i 2
H1 : Var (yi) = +i g( ),i usually g( )=
i

Test for over (or

under
dispersion
is
=0 in
y ) y
^

^
2

We check the t-ratio for

Diagnostic Testing
An alternative approach is by Wooldridge(1996)
which involves regressing the square of
standardized residuals-1 on the forecasted value
and testing alpha = 0 in the following test
(y )
equation
1

In case of miss-specification, we can compute QML

estimators, which are robust they are consistent
estimates as long as the conditional mean in correctly
specified, even if the distribution is incorrectly
specified.

Diagnostic Testing
With miss-specification, the std errors will not be
consistent. We can compute robust std errors using
Huber/White (QML) option or GLM , which corrects the
std errors for miss-specification.
For Poisson, MLE are also QMLE
The respective std errors are:
1

varQML ( ) H

g g
i

'
i

And,

varGLM ( ) varML ( )

Where,

( yi i ) 2
1

N K i 1
i
2

Empirical Examples
Done in Eviews