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Modeling indices using partial least squares: How to determine the optimum weights?

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  • Taşkın DİRSEHAN

    (Marmara University
    University of Twente)

  • Jörg HENSELER

    (University of Twente
    Universidade Nova de Lisboa)

Abstract

Indices are often used to model theoretical concepts in economics and finance. Beyond the econometric models used to test the relationships between these variables, partial least squares path modeling (PLS-PM) allows the study of complex models, but it is an estimator that is still in its infancy in economics and finance research. Thus, the use of PLS-PM for composite analysis needs to be explored further. As one such attempt, this paper is focused on the determination of the indices’ optimum weights. For this purpose, the effects of the market potential index (MPI) on foreign direct investment (FDI) and gross domestic product (GDP) were analysed by implementing different weighting schemes. The assessment of the model shows that PLS Mode B leads to better model fit.

Suggested Citation

  • Taşkın DİRSEHAN & Jörg HENSELER, 2023. "Modeling indices using partial least squares: How to determine the optimum weights?," Quality & Quantity: International Journal of Methodology, Springer, vol. 57(4), pages 521-535, December.
    • Handle: RePEc:spr:qualqt:v:57:y:2023:i:4:d:10.1007_s11135-022-01515-5
    DOI: 10.1007/s11135-022-01515-5
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