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A New Asymmetric Interaction Ridge (AIR) Regression Method


  • Månsson, Kristofer

    () (The Swedish Retail Institute)

  • Shukur, Ghazi

    (The Swedish Retail Institute)

  • Sjölander, Pär

    (The Swedish Retail Institute)


Despite that interaction terms are standard tools of regression analysis, the side effects of the inclusion of these terms in models estimated by ordinary least squares (OLS) are yet not fully penetrated. The inclusion of interaction effects induces multicollinearity problems since all non-zero values are equal between the interaction term and the regressor. In this article we propose a procedure to remedy this problem by the use of new ridge regression (RR) shrinkage parameters – which we call the asymmetric interaction ridge (AIR) regression method. By means of Monte Carlo simulations we evaluate both OLS and AIR using the mean square error (MSE) performance criterion. The result from the simulation study confirms our hypothesis that AIR always should be preferred to OLS since it has a lower estimated MSE. Moreover, the advantages of our new method is demonstrated in an empirical application where positive asymmetric price transmission effects are exposed for the mortgage interest rates of Handelsbanken Stadshypotek. It is observed that the mortgage interest rates increase more fully and rapidly to an increase in the bank’s borrowing costs than to a decrease. This asymmetry is defined as positive asymmetric price transmission (APT).

Suggested Citation

  • Månsson, Kristofer & Shukur, Ghazi & Sjölander, Pär, 2012. "A New Asymmetric Interaction Ridge (AIR) Regression Method," HUI Working Papers 54, HUI Research.
  • Handle: RePEc:hhs:huiwps:0054

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    References listed on IDEAS

    1. Alkhamisi, M.A. & Shukur, Ghazi, 2007. "Developing Ridge Parameters for SUR Models," Working Paper Series in Economics and Institutions of Innovation 80, Royal Institute of Technology, CESIS - Centre of Excellence for Science and Innovation Studies.
    2. Jochen Meyer & Stephan Cramon-Taubadel, 2004. "Asymmetric Price Transmission: A Survey," Journal of Agricultural Economics, Wiley Blackwell, vol. 55(3), pages 581-611.
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    More about this item


    OLS; multicollinearity; regression analysis;

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General


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