Paper 1, Section I, J

Statistical Modelling
Part II, 2015

The outputs Y1,,YnY_{1}, \ldots, Y_{n} of a particular process are positive and are believed to be related to pp-vectors of covariates x1,,xnx_{1}, \ldots, x_{n} according to the following model

log(Yi)=μ+xiTβ+εi\log \left(Y_{i}\right)=\mu+x_{i}^{T} \beta+\varepsilon_{i}

In this model εi\varepsilon_{i} are i.i.d. N(0,σ2)N\left(0, \sigma^{2}\right) random variables where σ>0\sigma>0 is known. It is not possible to measure the output directly, but we can detect whether the output is greater than or less than or equal to a certain known value c>0c>0. If

Zi={1 if Yi>c0 if YicZ_{i}= \begin{cases}1 & \text { if } Y_{i}>c \\ 0 & \text { if } Y_{i} \leqslant c\end{cases}

show that a probit regression model can be used for the data (Zi,xi),i=1,,n\left(Z_{i}, x_{i}\right), i=1, \ldots, n.

How can we recover μ\mu and β\beta from the parameters of the probit regression model?