Linear Regression Analysis

Linear regression analysis is a method to model the relationship between a dependent variable and one or more independent variables by fitting a linear equation to observed data. In financial markets, it is used to estimate how asset returns respond to various factors, such as market indices, interest rates, or liquidity metrics.

When detecting structural breaks, regression analysis is used to compare the fit of models across different time segments. If the linear relationship changes significantly, it serves as evidence of a structural shift in the market.

While simple, it remains a foundational tool for understanding correlations and dependencies between different financial assets. It provides the baseline for more complex models, allowing analysts to quantify the strength and direction of relationships.

Despite its limitations in capturing non-linear dynamics, it is an essential first step in any quantitative analysis.