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Let say I have criteria 1, 2, 3, and 4. I would like the Dummy variable to be 1 only if a certain minimum amount of criteria are met. For example, if 3 of the 4 are true, then Dummy =1. If 4 of the 4 are true, then Dummy = 1. But if only 1 or 2 are true Dummy = 0.

What would be the theory / practical / research to refer to that decide how much of this criteria is enough to meet for the dummy to be 1? Possible readings that you have seen this applied in would also be welcome.

The dummy application is in a regression model.

MLux
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    Hi! The answer to your other question seems to answer this in part, since there the effective condition for such a "complex" dummy is that dummy1 and dummy2 are both one. If these are dummies for the conditions 3 and 4 described in this question, then you have your multiple criteria that need to be met. – Giskard Jan 21 '24 at 08:41
  • Also, there seems to be a disconnect between the body of your question and the tags: there is nothing about finance in your question. – Giskard Jan 21 '24 at 08:42
  • I will elaborate. It is being applied in crisis situations (hence finance). Crisis are often not well defined in smaller G20 economies. In literature and practice, crisis cause volatility in exchange rates, market returns and so forth. Now if I set up 5 criteria, and want 4 out of the 5 criteria to be met for the Dummy to equal 1, what framework is applicable?

    The question you are referring to would require all conditions to be true. I am specifically asking about partial fulfillment being sufficient.

     – MLux Jan 22 '24 at 05:16
  • Does this answer your question? Can I multiply two dummy variables together? – csilvia Jan 25 '24 at 01:07

1 Answers1

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"Dummy variables" are binary variables, i.e. indicator functions. The indicator function takes the value $1$ if the associated event happens:

$$I\{A\}= \begin{cases} 1 & A\; {\rm happens} \\ 0 & {\rm otherwise} \end{cases}.$$

Event $A$ can be anything, like in your case $A=\{$at least three criteria are met$\}$.

In practice, you will most likely create intermediate $\{0,1\}$ dummy variables for each criterion, $I_1,...,I_4$, then sum them per observation, $S = \sum I_i$, and set $A=\{S\geq 3\}$ and your final dummy will be $I\{S\geq 3\}$.

Alecos Papadopoulos
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