If we wanted to measure the seasonal variations on stock market performance by month, we would need:
A)50 indicator variables, since the stock market has a 5-day working week.
B)12 indicator variables to represent the 12 months.
C)11 indicator variables.
D)55 indicator variables.

Question

Quizplus · Accepted Answer

To measure seasonal variations by month, we would use 11 indicator variables, not 12. This is because one month must be used as a reference category, and the effects of the other months are measured relative to this reference. This approach avoids the dummy variable trap, which occurs when the indicator variables are multicollinear.

If We Wanted to Measure the Seasonal Variations on Stock