If we want 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 work per week
B)12 indicator variables to represent the 12 months
C)11 indicator variables
D)52 indicator variables

Question

Quizplus · Accepted Answer

To measure seasonal variations by month, we would need 11 indicator variables due to the principle of dummy variable trap, where one category is omitted to avoid multicollinearity. With 12 months, using 11 dummies allows the omitted month to serve as the baseline.

If We Want to Measure the Seasonal Variations on Stock