# We say that a student scores at the th quantile of a standardized exam if

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1 Journal of Economic Perspectives Volume 15, Number 4 Fall 2001 Pages Quantile Regression Roger Koenker and Kevin F. Hallock We say that a student scores at the th quantile of a standardized exam if he performs better than the proportion of the reference group of students and worse than the proportion (1 ). Thus, half of students perform better than the median student and half perform worse. Similarly, the quartiles divide the population into four segments with equal proportions of the reference population in each segment. The quintiles divide the population into five parts; the deciles into ten parts. The quantiles, or percentiles, or occasionally fractiles, refer to the general case. Quantile regression as introduced by Koenker and Bassett (1978) seeks to extend these ideas to the estimation of conditional quantile functions models in which quantiles of the conditional distribution of the response variable are expressed as functions of observed covariates. In Figure 1, we illustrate one approach to this task based on Tukey s boxplot (as in McGill, Tukey and Larsen, 1978). Annual compensation for the chief executive officer (CEO) is plotted as a function of firm s market value of equity. A sample of 1,660 firms was split into ten groups of equal size according to their market capitalization. For each group of 166 firms, we compute the three quartiles of CEO compensation: salary, bonus and other compensation, including stock options (as valued by the Black-Scholes formula at the time of the grant). For each group, the bow-tie-like box represents the middle half of the salary distribution lying between the first and third quartiles. The horizontal line near the middle of each box represents the median compensation for each group of CEOs, and the y Roger Koenker is William B. McKinley Professor of Economics and Professor of Statistics, and Kevin F. Hallock is Associate Professor of Economics and of Labor and Industrial Relations, University of Illinois at Urbana-Champaign, Champaign, Illinois. Their addresses are and respectively.

2 144 Journal of Economic Perspectives Figure 1 Pay of Chief Executive Officers by Firm Size Notes: The boxplots provide a summary of the distribution of CEO annual compensation for ten groupings of firms ranked by market capitalization. The light gray vertical lines demarcate the deciles of the firm size groupings. The upper and lower limits of the boxes represent the first and third quartiles of pay. The median for each group is represented by the horizontal bar in the middle of each box. Source: Data on CEO annual compensation from EXECUCOMP in notches represent an estimated confidence interval for each median estimate. The full range of the observed salaries in each group is represented by the horizontal bars at the end of the dashed whiskers. In cases where the whiskers would extend more than three times the interquartile range, they are truncated and the remaining outlying points are indicated by open circles. The mean compensation for each group is also plotted: the geometric mean as a and the arithmetic mean asa*. There is a clear tendency for compensation to rise with firm size, but one can also discern several other features from the plot. Even on the log scale, there is a tendency for dispersion, as measured by the interquartile range of log compensation, to increase with firm size. This effect is accentuated if we consider the upper and lower tails of the salary distribution. By characterizing the entire distribution of annual compensation for each group, the plot provides a much more complete picture than would be offered by simply plotting the group means or medians. Here we have the luxury of a moderately large sample size in each group. Had we had several covariates, grouping observations into homogeneous cells, each with a sufficiently large number of observations, would become increasingly difficult. In classical linear regression, we also abandon the idea of estimating separate means for grouped data as in Figure 1, and we assume that these means fall on a line or some linear surface, and we estimate instead the parameters of this linear model. Least squares estimation provides a convenient method of estimating such condi-

3 Roger Koenker and Kevin F. Hallock 145 tional mean models. Quantile regression provides an equally convenient method for estimating models for conditional quantile functions. Quantiles via Optimization Quantiles seem inseparably linked to the operations of ordering and sorting the sample observations that are usually used to define them. So it comes as a mild surprise to observe that we can define the quantiles through a simple alternative expedient as an optimization problem. Just as we can define the sample mean as the solution to the problem of minimizing a sum of squared residuals, we can define the median as the solution to the problem of minimizing a sum of absolute residuals. The symmetry of the piecewise linear absolute value function implies that the minimization of the sum of absolute residuals must equate the number of positive and negative residuals, thus assuring that there are the same number of observations above and below the median. What about the other quantiles? Since the symmetry of the absolute value yields the median, perhaps minimizing a sum of asymmetrically weighted absolute residuals simply giving differing weights to positive and negative residuals would yield the quantiles. This is indeed the case. Solving min R y i, where the function is the tilted absolute value function appearing in Figure 2 that yields the th sample quantile as its solution. 1 Having succeeded in defining the unconditional quantiles as an optimization problem, it is easy to define conditional quantiles in an analogous fashion. Least squares regression offers a model for how to proceed. If, presented with a random sample { y 1, y 2,..., y n }, we solve min R n y i 2, i 1 we obtain the sample mean, an estimate of the unconditional population mean, EY. If we now replace the scalar by a parametric function ( x, ) and solve min R p n y i x i, 2, i 1 we obtain an estimate of the conditional expectation function E(Y x). 1 To see this more formally, one need only compute directional derivatives with respect to.

4 146 Journal of Economic Perspectives Figure 2 Quantile Regression Function In quantile regression, we proceed in exactly the same way. To obtain an estimate of the conditional median function, we simply replace the scalar in the first equation by the parametric function ( x i, ) and set to 1. Variants of this 2 idea were proposed in the mid-eighteenth century by Boscovich and subsequently investigated by Laplace and Edgeworth, among others. To obtain estimates of the other conditional quantile functions, we replace absolute values by and solve min R p y i x i,. The resulting minimization problem, when ( x, ) is formulated as a linear function of parameters, can be solved very efficiently by linear programming methods. Quantile Engel Curves To illustrate the basic ideas, we briefly reconsider a classical empirical application in economics, Engel s (1857) analysis of the relationship between household food expenditure and household income. In Figure 3, we plot Engel s data taken from 235 European working-class households. Superimposed on the plot are seven estimated quantile regression lines corresponding to the quantiles {0.05, 0.1, 0.25, 0.5, 0.75, 0.9, 0.95}. The median 0.5 fit is indicated by the darker solid line; the least squares estimate of the conditional mean function is plotted as the dashed line. The plot clearly reveals the tendency of the dispersion of food expenditure to increase along with its level as household income increases. The spacing of the quantile regression lines also reveals that the conditional distribution of food expenditure is skewed to the left: the narrower spacing of the upper quantiles indicating high density and a short upper tail and the wider spacing of the lower quantiles indicating a lower density and longer lower tail.

5 Quantile Regression 147 Figure 3 Engel Curves for Food Notes: This figure plots data taken from Engel s (1857) study of the dependence of households food expenditure on household income. Seven estimated quantile regression lines for different values of {0.05, 0.1, 0.25, 0.5, 0.75, 0.9, 0.95} are superimposed on the scatterplot. The median 0.5 is indicated by the darker solid line; the least squares estimate of the conditional mean function is indicated by the dashed line. The conditional median and mean fits are quite different in this example, a fact that is partially explained by the asymmetry of the conditional density and partially by the strong effect exerted on the least squares fit by the two unusual points with high income and low food expenditure. Note that one consequence of this nonrobustness is that the least squares fit provides a rather poor estimate of the conditional mean for the poorest households in the sample. Note that the dashed least squares line passes above all of the very low income observations. We have occasionally encountered the faulty notion that something like quantile regression could be achieved by segmenting the response variable into subsets according to its unconditional distribution and then doing least squares fitting on these subsets. Clearly, this form of truncation on the dependent variable would yield disastrous results in the present example. In general, such strategies are doomed to failure for all the reasons so carefully laid out in Heckman s (1979) work on sample selection. In contrast, segmenting the sample into subsets defined according to the conditioning covariates is always a valid option. Indeed, such local fitting underlies all nonparametric quantile regression approaches. In the most extreme cases, we have p distinct cells corresponding to different settings of the covariate vector, x, and quantile regression reduces simply to computing ordinary univariate quantiles for each of these cells. In intermediate cases, we may wish to project these cell estimates onto a more parsimonious (linear) model; see Chamberlain (1994) and Knight, Bassett and Tam (2000) for examples of this approach. Another variant is

6 148 Journal of Economic Perspectives the suggestion that instead of estimating linear conditional quantile models, we could instead estimate a family of binary response models for the probability that the response variable exceeded some prespecified cutoff values. 2 Quantile Regression and Determinants of Infant Birthweight In this section, we reconsider a recent investigation by Abrevaya (2001) of the impact of various demographic characteristics and maternal behavior on the birthweight of infants born in the United States. Low birthweight is known to be associated with a wide range of subsequent health problems and has even been linked to educational attainment and eventual labor market outcomes. Consequently, there has been considerable interest in factors influencing birthweights and public policy initiatives that might prove effective in reducing the incidence of low-birthweight infants, which is conventionally defined by whether infants weigh less than 2500 grams at birth, about 5 pounds, 9 ounces. Most of the analysis of birthweights has employed conventional least squares regression methods. However, it has been recognized that the resulting estimates of various effects on the conditional mean of birthweights were not necessarily indicative of the size and nature of these effects on the lower tail of the birthweight distribution. A more complete picture of covariate effects can be provided by estimating a family of conditional quantile functions. 3 Our analysis is based on the June 1997 Detailed Natality Data published by the National Center for Health Statistics. Like Abrevaya (2001), we limit the sample to live, singleton births, with mothers recorded as either black or white, between the ages of 18 and 45, residing in the United States. Observations with missing data for any of the variables described below were dropped from the analysis. This process yielded a sample of 198,377 babies. Birthweight, the response variable, is recorded in grams. Education of the mother is divided into four categories: less than high school, high school, some college and college graduate. The omitted category is less than high school so coefficients may be interpreted relative to this category. The prenatal medical care of the mother is also divided into four categories: those with no prenatal visit, those whose first prenatal visit was in the first trimester of the pregnancy, those with first visit in the second trimester and those with first visit in the last trimester. The omitted category is the group with a first visit in the first trimester; they constitute almost 85 percent of the sample. An indicator of whether 2 This approach replaces the hypothesis of conditional quantile functions that are linear in parameters with the hypothesis that some transformation of the various probabilities of exceeding the chosen cutoffs, say the logistic, could instead be expressed as linear functions in the observed covariates. In our view, the conditional quantile assumption is more natural, if only because it nests within it the independent and identically distributed error location shift model of classical linear regression. 3 In an effort to focus attention more directly on the lower tail, several studies have recently explored binary response (probit) models for the occurrence of low birthweights.

8 150 Journal of Economic Perspectives Figure 4 Ordinary Least Squares and Quantile Regression Estimates for Birthweight Model Mother s age enters the model as a quadratic effect, shown in the first two figures of the second row. At the lower quantiles, the mother s age tends to be more concave, increasing birthweight from age 18 to about age 30, but tending to decrease birthweight when the mother s age is beyond 30. At higher quantiles, this

10 152 Journal of Economic Perspectives indicative of an interaction between observed educational attainment and unobserved ability. There is also a large literature dealing with related issues in labor markets outside the United States, including Fitzenberger (1999) on Germany; Machado and Mata (1999) on Portugal; Garcia, Hernandez and Lopez-Nicolas (2001) on Spain; Schultz and Mwabu (1998) on South Africa; and Kahn (1998) on international comparisons. The work of Machado and Mata (1999) is particularly notable since it introduces a useful way to extend the counterfactual wage decomposition approach of Oaxaca (1973) to quantile regression and provides a general strategy for simulating marginal distributions from the quantile regression process. Tannuri (2000) has employed this approach in a recent study of assimilation of U.S. immigrants. In other applied micro areas, Eide and Showalter (1998), Knight, Bassett and Tam (2000) and Levin (2001) have addressed school quality issues. Poterba and Rueben (1995) and Mueller (2000) study public-private wage differentials in the United States and Canada. Abadie, Angrist and Imbens (2001) consider estimation of endogenous treatment effects in program evaluation, and Koenker and Billias (2001) explore quantile regression models for unemployment duration data. Work by Viscusi and Hamilton (1999) considers public decision making regarding hazardous waste cleanup. Deaton (1997) offers a nice introduction to quantile regression for demand analysis. In a study of Engel curves for food expenditure in Pakistan, he finds that although the median Engel elasticity of is similar to the ordinary least squares estimate of 0.909, the coefficient at the tenth quantile is and the estimate at the 90th percentile is 0.946, indicating a pattern of heteroskedasticity like that of our Figure 3. In another demand application, Manning, Blumberg and Moulton (1995) study demand for alcohol using survey data from the National Health Interview Study and find considerable heterogeneity in the price and income elasticities over the full range of the conditional distribution. Hendricks and Koenker (1992) investigate demand for electricity by time of day using a hierarchical model. Earnings inequality and mobility is a natural arena of applications for quantile regression. Conley and Galenson (1998) explore wealth accumulation in several U.S. cities in the mid-nineteenth century. Gosling, Machin and Meghir (2000) study the income and wealth distribution in the United Kingdom. Trede (1998) and Morillo (2000) compare earnings mobility in the United States and Germany. There is also a growing literature in empirical finance employing quantile regression methods. One strand of this literature is the rapidly expanding literature on value at risk: this connection is developed in Taylor (1999), Chernozhukov and Umantsev (2001) and Engle and Manganelli (1999). Bassett and Chen (2001) consider quantile regression index models to characterize mutual fund investment styles.

11 Roger Koenker and Kevin F. Hallock 153 Software and Standard Errors The diffusion of technological change throughout statistics is closely tied to its embodiment in statistical software. This is particularly true of quantile regression methods, since the linear programming algorithms that underlie reliable implementations of the methods appear somewhat esoteric to some users. Since the early 1950s, it has been recognized that median regression methods based on minimizing sums of absolute residuals can be formulated as linear programming problems and efficiently solved with some form of the simplex algorithm. 5 Among commercial programs in common use in econometrics, Stata and TSP offer some basic functionality for quantile regression within the central core of the package distributed by the vendor. Since the mid-1980s, one of us has maintained a public domain package of quantile regression software designed for the S language of Becker, Chambers and Wilks (1988) and the related commercial package Splus. Recently, this package has been extended to provide a version for R, the impressive public domain dialect of S (Koenker, 1995). This website also provides quantile regression software for Ox and Matlab languages. It is a basic principle of sound econometrics that every serious estimate deserves a reliable assessment of precision. There is now an extensive literature on the asymptotic behavior of quantile regression estimators and considerable experience with inference methods based on this theory, as well as a variety of resampling schemes. We have recently undertaken a comparison of several approaches to the construction of confidence intervals for a problem typical of current applications in labor economics. We find that the discrepancies among competing methods are slight, and inference for quantile regression is, if anything, more robust than for most other forms of inference commonly encountered in econometrics. Koenker and Hallock (2000) describe this exercise in more detail and provide a brief survey of recent work on quantile regression for discrete data models, time series, nonparametric models and a variety of other areas. Some of these developments have been slow to percolate into standard econometric software. With the notable exceptions of Stata and Xplore (Cizek, 2000) and the packages available from the web for Splus and R, none of the implementations of quantile regression in econometric software packages include any functionality for inference. 5 The median regression algorithm of Barrodale and Roberts (1974) has proven particularly influential and can be easily adapted for general quantile regression. Koenker and d Orey (1987) describe one implementation. For large-scale quantile regression problems, Portnoy and Koenker (1997) have shown that a combination of interior point methods and effective preprocessing renders quantile regression computation competitive with least squares computations for problems of comparable size.

12 154 Journal of Economic Perspectives Conclusion Much of applied statistics may be viewed as an elaboration of the linear regression model and associated estimation methods of least squares. In beginning to describe these techniques, Mosteller and Tukey (1977, p. 266) remark in their influential text: What the regression curve does is give a grand summary for the averages of the distributions corresponding to the set of x s. We could go further and compute several different regression curves corresponding to the various percentage points of the distributions and thus get a more complete picture of the set. Ordinarily this is not done, and so regression often gives a rather incomplete picture. Just as the mean gives an incomplete picture of a single distribution, so the regression curve gives a corresponding incomplete picture for a set of distributions. We would like to think that quantile regression is gradually developing into a comprehensive strategy for completing the regression picture. y We would like to thank the editors, as well as Gib Bassett, John DiNardo, Olga Geling, Bernd Fitzenberger and Steve Portnoy for helpful comments on earlier drafts. The research was partially supported by NSF grant SES References Abadie, Alberto, Joshua Angrist and Guido Imbens Instrumental Variables Estimation of Quantile Treatment Effects. Econometrica. Forthcoming. Abrevaya, Jason The Effects of Demographics and Maternal Behavior on the Distribution of Birth Outcomes. Empirical Economics. March, 26:1, pp Arias, Omar, Kevin Hallock and Walter Sosa- Escudero Individual Heterogeneity in the Returns to Schooling: Instrumental Variables Quantile Regression Using Twins Data. Empirical Economics. March, 26:1, pp Barrodale, I. and F. Roberts Solution of an Overdetermined System of Equations in the L1 Norm [F4] (Algorithm 478). Communications of the ACM. 17:6, pp Bassett, Gilbert and Hsiu-Lang Chen Quantile Style: Return-Based Attribution Using Regression Quantiles. Empirical Economics. March, 26:1, pp Becker, Richard, John Chambers and Allan Wilks The New S Language: A Programming Environment for Data Analysis and Graphics. Pacific Grove: Wadsworth. Buchinsky, Moshe Changes in U.S. Wage Structure : An Application of Quantile Regression. Econometrica. March, 62:2, pp Buchinsky, Moshe The Dynamics of Changes in the Female Wage Distribution in the USA: A Quantile Regression Approach. Journal of Applied Econometrics. January/February, 13:1, pp

13 Quantile Regression 155 Chamberlain, Gary Quantile Regression, Censoring and the Structure of Wages, in Advances in Econometrics. Christopher Sims, ed. New York: Elsevier, pp Chernozhukov, V. and L. Umantsev Conditional Value-at-Risk: Aspects of Modeling and Estimation. Empirical Economics. March, 26:1, pp Cizek, Pavel Quantile Regression, in XploRe Application Guide. Wolfgang Hardle, Zdenk Hlavka and Sigbert Klinke, eds. Heidelberg: Springer-Verlag, pp Conley, Timothy and David Galenson Nativity and Wealth in Mid-Nineteenth-Century Cities. Journal of Economic History. June, 58:2, pp Deaton, Angus The Analysis of Household Surveys. Baltimore: Johns Hopkins. Eide, Eric and Mark Showalter The Effect of School Quality on Student Performance: A Quantile Regression Approach. Economics Letters. March, 58:3, pp Engel, Ernst Die Produktions- und Konsumptionverhaltnisse des Konigreichs Sachsen. Reprinted in Die Lebenkosten Belgischer Arbeiter-Familien Fruher und Jetzt. International Statistical Institute Bulletin. 9, pp Engle, Robert and Simone Manganelli CaViaR: Conditional Autoregressive Value at Risk by Regression Quantiles. University of California, San Diego, Department of Economics Working Paper 99/20. October. Fitzenberger, Bernd Wages and Employment Across Skill Groups. Heidelberg: Physica- Verlag. Garcia, Jaume, Pedro Hernandez and Angel Lopez-Nicolas How Wide is the Gap? An Investigation of Gender Wage Differences Using Quantile Regression. Empirical Economics. March, 26:1, pp Gosling, Amanda, Stephen Machin and Costas Meghir The Changing Distribution of Male Wages in the U.K. Review of Economic Studies. October, 67:4, pp Heckman, James J Sample Selection Bias as a Specification Error. Econometrica. January, 47:1, pp Hendricks, Wallace and Roger Koenker Hierarchical Spline Models for Conditional Quantiles and the Demand for Electricity. Journal of the American Statistical Association. March, 87:417, pp Kahn, Lawrence Collective Bargaining and the Interindustry Wage Structure: International Evidence. Economica. November, 65:260, pp Knight, Keith, Gilbert Bassett and Mo-Yin S. Tam Comparing Quantile Estimators for the Linear Model. Preprint. Koenker, Roger Quantile Regression Software. Available at econ.uiuc.edu/ roger/research/rq/rq.html. Koenker, Roger and Gilbert Bassett Regression Quantiles. Econometrica. January, 46:1, pp Koenker, Roger and Yannis Bilias Quantile Regression for Duration Data: A Reappraisal of the Pennsylvania Reemployment Bonus Experiments. Empirical Economics. March, 26:1, pp Koenker, Roger and Vasco d Orey Computing Regression Quantiles. Applied Statistics. 36, pp Koenker, Roger and Kevin Hallock Quantile Regression: An Introduction. Available at roger/ research/intro/intro.html. Koenker, Roger and José Machado Goodness of Fit and Related Inference Processes for Quantile Regression. Journal of the American Statistical Association. December, 94:448, pp Levin, Jesse For Whom the Reductions Count: A Quantile Regression Analysis of Class Size on Scholastic Achievement. Empirical Economics. March, 26:1, pp Machado, José and José Mata Counterfactual Decomposition of Changes in Wage Distributions Using Quantile Regression. Preprint. Manning, Willard, Linda Blumberg and Lawrence Moulton The Demand for Alcohol: The Differential Response to Price. Journal of Health Economics. June, 14:2, pp McGill, Robert, John W. Tukey and Wayne A. Larsen Variations of Box Plots. American Statistician. February, 32, pp Morillo, Daniel Income Mobility with Nonparametric Quantiles: A Comparison of the U.S. and Germany. Preprint. Mosteller, Frederick and John Tukey Data Analysis and Regression: A Second Course in Statistics. Reading, Mass.: Addison-Wesley. Mueller, R Public- and Private-Sector Wage Differentials in Canada Revisited. Industrial Relations. July, 39:3, pp Oaxaca, Ronald Male-Female Wage Differentials in Urban Labor Markets. International Economic Review. October, 14:3, pp Portnoy, Stephen and Roger Koenker

14 156 Journal of Economic Perspectives The Gaussian Hare and the Laplacian Tortoise: Computability of Squared-Error Versus Absolute-Error Estimators, with Discussion. Statistical Science. 12:4, pp Poterba, James and Kim Rueben The Distribution of Public Sector Wage Premia: New Evidence Using Quantile Regression Methods. NBER Working Paper No Schultz, T. Paul and Germano Mwabu Labor Unions and the Distribution of Wages and Employment in South Africa. Industrial and Labor Relations Review. July, 51:4, pp Tannuri, Maria Are the Assimilation Processes of Low and High Income Immigrants Distinct? A Quantile Regression Approach. Preprint. Taylor, James A Quantile Regression Approach to Estimating the Distribution of Multiperiod Returns. Journal of Derivatives. 7:1, pp Trede, Mark Making Mobility Visible: A Graphical Device. Economics Letters. April, 59:1, pp Viscusi, W. Kip and James Hamilton Are Risk Regulators Rational? Evidence from Hazardous Waste Cleanup Decisions. American Economic Review. September, 89:4, pp

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