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- chartreuse
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Orthogonalized residuals
Hi.How does one compute orthogonalized residuals? I'm looking to regress changes in spreads on some explanatory variables like GDP and use "orthogonalized residuals" from the regression as an input as a regressor to another regression. Thank you!
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- chartreuse
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Orthogonalized residuals
Sorry, let me clarify: use "orthogonalized residuals" from the regression as a regressor in another regression.
Orthogonalized residuals
There are probably several ways to do this, but I would run PCA on the residuals. That way, not only will the end result be orthogonal, but you have a natural ordering of them in terms of their "importance", i.e. the amount of variance they explain.