Author: Serhii Zabolotnii
Date: 2026-04-06

# Introduction to PMM2: Polynomial Maximization Method

#### Serhii Zabolotnii

#### 2026-04-06

## The Problem: When OLS Falls Short

Ordinary Least Squares (OLS) is the workhorse of regression analysis, providing Best Linear Unbiased Estimators (BLUE) under the Gauss-Markov assumptions. However, when error distributions deviate from normality—particularly when they exhibit skewness—OLS estimates, while still unbiased, lose statistical efficiency. This means:

- Higher variance in parameter estimates
- Wider confidence intervals
- Reduced statistical power for hypothesis tests

### Practical Implications

Consider scenarios where non-normal errors are common:

- Financial data: Asset returns often have heavy tails and skewness
- Environmental measurements: Contamination levels, precipitation
- Biomedical applications: Biological markers with asymmetric distributions
- Engineering: Measurement errors from physical processes

In these contexts, relying solely on OLS can lead to suboptimal inference.

## The Solution: Polynomial Maximization Method (PMM2)

The Polynomial Maximization Method of order 2 (PMM2) is a moment-based estimation technique that leverages higher-order moments of residuals to achieve:

1. Lower variance estimates compared to OLS when errors are non-Gaussian
2. Robustness to skewness and kurtosis in error distributions
3. Asymptotic efficiency gains validated through Monte Carlo studies

### Theoretical Foundation

PMM2 works by constructing a system of polynomial equations based on central moments:

\[ Z_j(\beta) = \sum_{i=1}^{n} x_{ij} \left[ A \cdot \hat{y}_i^2 + B \cdot \hat{y}_i + C \right] = 0 \]

where:

- \(A = m_3\) (third central moment)
- \(B = m_4 - m_2^2 - 2m_3 y_i\) (involves fourth moment)
- \(C = m_3 y_i^2 - (m_4 - m_2^2) y_i - m_2 m_3\)

The algorithm iteratively solves this system using a gradient-based approach, starting from OLS estimates.

Reference: Zabolotnii et al. (2018) - “Polynomial Estimation of Linear Regression Parameters for the Asymmetric PDF of Errors” (Springer, AUTOMATION 2018)

## Getting Started with EstemPMM

Let’s explore PMM2 with practical examples using the `EstemPMM` package.

    library(EstemPMM)
    set.seed(123)

## Example 1: Simple Linear Regression with Skewed Errors

We’ll simulate data where errors follow a skewed distribution (using \(\chi^2\)) to demonstrate PMM2’s advantages.

### Data Generation

    # Sample size
    n <- 200

    # Generate predictor
    x <- rnorm(n, mean = 5, sd = 2)

    # True parameters
    beta_0 <- 10
    beta_1 <- 2.5

    # Generate highly skewed errors using chi-squared distribution
    # (chi-square with df=3 has skewness ~ 1.63)
    errors <- rchisq(n, df = 3) - 3  # Center to have mean ~ 0

    # Response variable
    y <- beta_0 + beta_1 * x + errors

    # Create data frame
    dat <- data.frame(y = y, x = x)

### Visualize Error Distribution

    # Fit OLS to get residuals for visualization
    fit_ols_temp <- lm(y ~ x, data = dat)
    residuals_ols <- residuals(fit_ols_temp)

    # Plot histogram of residuals
    par(mfrow = c(1, 2))
    hist(residuals_ols, breaks = 30, main = "Residual Distribution",
         xlab = "Residuals", col = "lightblue", border = "white")
    qqnorm(residuals_ols, main = "Q-Q Plot")
    qqline(residuals_ols, col = "red", lwd = 2)

    par(mfrow = c(1, 1))

    # Calculate skewness and kurtosis
    cat(sprintf("Skewness: %.3f\n", pmm_skewness(residuals_ols)))
    #> Skewness: 1.865
    cat(sprintf("Excess Kurtosis: %.3f\n", pmm_kurtosis(residuals_ols) - 3))
    #> Excess Kurtosis: 1.710

The histogram and Q-Q plot clearly show right skewness, violating the normality assumption that underpins OLS optimality.

### Model Fitting: PMM2 vs OLS

    # Fit PMM2 model
    fit_pmm2 <- lm_pmm2(y ~ x, data = dat, verbose = FALSE)

    # Fit OLS model for comparison
    fit_ols <- lm(y ~ x, data = dat)

    # Display coefficients
    cat("=== OLS Estimates ===\n")
    #> === OLS Estimates ===
    print(coef(fit_ols))
    #> (Intercept)           x
    #>   10.188412    2.423676

    cat("\n=== PMM2 Estimates ===\n")
    #>
    #> === PMM2 Estimates ===
    print(coef(fit_pmm2))
    #> [1] 9.980738 2.465210

    cat("\n=== True Values ===\n")
    #>
    #> === True Values ===
    cat("Intercept:", beta_0, "\n")
    #> Intercept: 10
    cat("Slope:    ", beta_1, "\n")
    #> Slope:     2.5

### Bootstrap Inference for Variance Comparison

To rigorously compare estimator efficiency, we use bootstrap inference:

    # Perform bootstrap inference
    boot_results <- pmm2_inference(fit_pmm2, formula = y ~ x, data = dat,
                                   B = 500)

    # Display summary with confidence intervals
    summary(boot_results)
    #>     Estimate       Std.Error          t.value         p.value     conf.low
    #>  Min.   :2.465   Min.   :0.06404   Min.   :27.25   Min.   :0   Min.   :2.348
    #>  1st Qu.:4.344   1st Qu.:0.13959   1st Qu.:30.06   1st Qu.:0   1st Qu.:4.072
    #>  Median :6.223   Median :0.21514   Median :32.87   Median :0   Median :5.796
    #>  Mean   :6.223   Mean   :0.21514   Mean   :32.87   Mean   :0   Mean   :5.796
    #>  3rd Qu.:8.102   3rd Qu.:0.29069   3rd Qu.:35.68   3rd Qu.:0   3rd Qu.:7.520
    #>  Max.   :9.981   Max.   :0.36624   Max.   :38.49   Max.   :0   Max.   :9.244
    #>    conf.high
    #>  Min.   : 2.597
    #>  1st Qu.: 4.615
    #>  Median : 6.634
    #>  Mean   : 6.634
    #>  3rd Qu.: 8.652
    #>  Max.   :10.670

The bootstrap results provide:

- Standard errors for PMM2 estimates
- 95% confidence intervals using percentile and bias-corrected methods
- Comparison with OLS standard errors

Key Observation: PMM2 standard errors are typically 10-30% smaller than OLS when errors are skewed, indicating higher precision.

## Example 2: Multiple Regression

PMM2 extends naturally to multiple predictors.

    # Generate multiple predictors
    n <- 250
    x1 <- rnorm(n, mean = 0, sd = 1)
    x2 <- runif(n, min = -2, max = 2)
    x3 <- rexp(n, rate = 0.5)

    # True model
    beta <- c(5, 1.2, -0.8, 2.0)  # Intercept, x1, x2, x3
    errors <- rt(n, df = 4)  # t-distribution with heavy tails

    y <- beta[1] + beta[2]*x1 + beta[3]*x2 + beta[4]*x3 + errors

    # Create data frame
    dat_multi <- data.frame(y = y, x1 = x1, x2 = x2, x3 = x3)

    # Fit models
    fit_pmm2_multi <- lm_pmm2(y ~ x1 + x2 + x3, data = dat_multi, verbose = FALSE)
    fit_ols_multi <- lm(y ~ x1 + x2 + x3, data = dat_multi)

    # Compare coefficients
    comparison <- data.frame(
      Parameter = c("Intercept", "x1", "x2", "x3"),
      True = beta,
      OLS = coef(fit_ols_multi),
      PMM2 = coef(fit_pmm2_multi)
    )

    print(comparison, row.names = FALSE)
    #>  Parameter True        OLS      PMM2
    #>  Intercept  5.0  4.9484846  4.939106
    #>         x1  1.2  1.2531710  1.249675
    #>         x2 -0.8 -0.8080797 -0.792286
    #>         x3  2.0  2.0101585  2.014457

## Example 3: Polynomial Regression

PMM2 handles polynomial terms seamlessly.

    # Generate data with quadratic relationship
    n <- 200
    x <- seq(-3, 3, length.out = n)
    errors <- rchisq(n, df = 5) - 5

    # True quadratic model: y = 2 + 3x - 0.5x^2
    y <- 2 + 3*x - 0.5*x^2 + errors

    dat_poly <- data.frame(y = y, x = x)

    # Fit polynomial model
    fit_pmm2_poly <- lm_pmm2(y ~ x + I(x^2), data = dat_poly, verbose = FALSE)

    # Summary
    summary(fit_pmm2_poly, formula = y ~ x + I(x^2), data = dat_poly)
    #> PMM2 estimation results
    #> Call:
    #> lm_pmm2(formula = y ~ x + I(x^2), data = dat_poly, verbose = FALSE)
    #>
    #> Coefficients:
    #> [1]  2.0897269  2.8725555 -0.4779162
    #>
    #> Central moments of initial residuals:
    #>   m2 = 10.05743
    #>   m3 = 37.45091
    #>   m4 = 489.7792
    #>
    #> Theoretical characteristics of PMM2 (S = 2):
    #>   c3 = 1.174172
    #>   c4 = 1.842015
    #>   g  = 0.6411572  (expected ratio Var[PMM2]/Var[OLS])
    #>
    #> Algorithm information:
    #>   Convergence status: TRUE
    #>   Iterations: 3
    #>
    #> Approximate statistical inference via bootstrap (B=100):
    #>     Estimate  Std.Error   t.value      p.value   conf.low  conf.high
    #> 1  2.0897269 0.28555149  7.318214 2.513545e-13  1.5799690  2.6122483
    #> 2  2.8725555 0.09797060 29.320586 0.000000e+00  2.6892140  3.0583990
    #> 3 -0.4779162 0.06130577 -7.795616 6.439294e-15 -0.5863997 -0.3492109

## Diagnostic Plots

PMM2 provides standard diagnostic methods:

    # Generate diagnostic plots
    plot(fit_pmm2_multi)
    title("PMM2 Diagnostics")

The diagnostic plots include:

1. Residuals vs Fitted: Check for non-linearity and heteroscedasticity
2. Q-Q Plot: Assess normality of residuals
3. Scale-Location: Check homoscedasticity assumption
4. Residuals vs Leverage: Identify influential observations

## Comparing PMM2 with OLS: Monte Carlo Evidence

Based on simulation studies documented in the package:

Model | Sample Size | MSE(PMM2) / MSE(OLS) | Variance Reduction
--- | --- | --- | ---
MA(1) | 200 / 1000 | 0.85 / 0.77 | 15-23%
MA(2) | 200 / 1000 | 0.68 / 0.74 | 26-32%
ARMA(1,1) | 200 / 1000 | 0.70 / 0.55 | 30-45%
ARIMA(1,1,1) | 300 / 1000 | 0.76 / 0.48 | 24-52%

These ratios less than 1.0 confirm that PMM2 achieves lower Mean Squared Error compared to classical methods (CSS/OLS) when errors deviate from normality.

## When to Use PMM2

Use PMM2 when:

- Error distributions exhibit skewness or heavy tails
- You need more precise estimates than OLS provides
- Working with financial, environmental, or biomedical data where non-normality is common
- Sample sizes are moderate to large (n ≥ 100 recommended)

Stick with OLS when:

- Errors are approximately Gaussian
- Sample sizes are very small (n < 50)
- Computational simplicity is paramount
- You need unbiased estimates regardless of efficiency

## Practical Recommendations

1. Always fit OLS first as a baseline comparison
2. Check residual diagnostics to assess non-normality
3. Use bootstrap inference (`pmm2_inference()`) for robust confidence intervals
4. Compare standard errors between OLS and PMM2 to quantify efficiency gains
5. Validate results with out-of-sample prediction when possible

## Next Steps

To learn more about EstemPMM:

- Time Series Applications: See `vignette("02-pmm2-time-series")` for AR, MA, ARMA, and ARIMA models
- Bootstrap Inference: See `vignette("03-bootstrap-inference")` for detailed statistical inference procedures
- Theoretical Background: Refer to Zabolotnii et al. (2018) cited in package documentation

## Summary

The PMM2 method provides a powerful alternative to OLS when error distributions deviate from normality. By leveraging higher-order moments, PMM2 achieves:

- 10-50% reduction in parameter estimate variance
- Improved statistical power for hypothesis testing
- Robust performance across various non-Gaussian error distributions

The `EstemPMM` package makes PMM2 accessible through an intuitive interface that mirrors standard R modeling functions like `lm()`.

## References

1. Zabolotnii, S., Warsza, Z.L., Tkachenko, O. (2018). “Polynomial Estimation of Linear Regression Parameters for the Asymmetric PDF of Errors”. In: Automation 2018. Advances in Intelligent Systems and Computing, vol 743. Springer, Cham. https://doi.org/10.1007/978-3-319-77179-3_75

2. Package documentation: `?lm_pmm2`, `?pmm2_inference`, `?compare_with_ols`

3. GitHub repository: https://github.com/SZabolotnii/EstemPMM