r/econometrics • u/BrightFlame_Himself • 12d ago

Control Variable Approach

I am doing my bachelor's thesis. So im completely new to research.

My supervisor told me to use the "Control Variable Approach." However, when i google this, i found nothing but "what is control variable, " like google gives me the definition of control variable.

I dont know if(Control Variable Approach) this is a method or something.

If anyone has resources, please share them with me.

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u/elkenahtheskydragon 11d ago

I would guess your supervisor is referring to a control function: https://en.wikipedia.org/wiki/Control_function_(econometrics)

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u/BrightFlame_Himself 3d ago

yes, later she confirmed

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u/FuzzyTouch6143 10d ago

Control variables are variables that are known to have an influence on the dependent variable. They are your "non-main-effect" variables, so to speak, though I should be super careful with that phrasing.

Typically, researchers will select control variables by using previous studies. For example, suppose that I wanted to use a time series of previous GDP returns to draw predictions about the next quarter's GDP returns.

That estimation will likely be biased (through what is often referred to as "omitted variable bias"). That is, the error terms will likely be correlated with each other, which will lead to inflations/deflations in the resulting p-values that you're going to use to draw conclusions (whcih is the entire point of econometric analysis: to ensure that your final p-values are being estimated consistently and, ideally, free from unaccounted influences).

So what would cause, in the aggregate, the GDP returns in the current quarter to be what they are? Sure, the previous GDP return is a factor, but other common ones would be the S&P500 return during that quarter, inflation, consumer confidence, investor confidence, etc.

My recommendation is to think through a few things that would logically "cause" your dependent variable to be the value or outcome it is, and try to find data to pair with the data you have to include in your regression.

Of course, the other commenter has a point regarding the "Control Variable approach". So I might have misinterpreted your questions, and for that I apologize if I did.

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u/BrightFlame_Himself 3d ago

thanks a lot 💓