kcmeans is an implementation of the K-Conditional-Means (KCMeans) regression estimator analyzed by Wiemann (2023; arxiv:2311.17021) for conditional expectation function estimation using categorical features. The implementation leverages the unconditional KMeans implementation in one dimension using dynamic programming of the Ckmeans.1d.dp package.

See the working paper Optimal Categorical Instrumental Variables for further discussion of the KCMeans estimator.

Installation

Install the latest development version from GitHub (requires devtools package):

if (!require("devtools")) {
  install.packages("devtools")
}
devtools::install_github("thomaswiemann/kcmeans", dependencies = TRUE)

Install the latest public release from CRAN:

install.packages("kcmeans")

Usage

To illustrate kcmeans, consider simulating a small dataset with a continuous outcome variable y, two observed predictors – a categorical variable Z and a continuous variable X – and an (unobserved) Gaussian error. As in Wiemann (2023), the reduced form has an unobserved lower-dimensional representation dependent on the latent categorical variable Z0.

# Load package
library(kcmeans)
# Set seed
set.seed(51944)
# Sample parameters
nobs = 800 # sample size
# Sample data
X <- rnorm(nobs)
Z <- sample(1:20, nobs, replace = T)
Z0 <- Z %% 4 # lower-dimensional latent categorical variable
y <- Z0 + X + rnorm(nobs)

kcmeans is then computed by combining the categorical feature with the continuous feature. By default, the categorical feature is the first column. Alternatively, the column corresponding to the categorical feature can be set via the which_is_cat argument. Computation is very quick – indeed the dynamic programming algorithm of the leveraged Ckmeans.1d.dp package is polynomial in the number of values taken by the categorical feature Z. See also ?kcmeans for details.

system.time({
kcmeans_fit <- kcmeans(y = y, X = cbind(Z, X), K = 4)
})
#>    user  system elapsed 
#>    1.19    0.12    2.11

We may now use the predict.kcmeans method to construct fitted values and/or compute predictions of the lower-dimensional latent categorical feature Z0. See also ?predict.kcmeans for details.

# Predicted values for the outcome + R^2
y_hat <- predict(kcmeans_fit, cbind(Z, X))
round(1 - mean((y - y_hat)^2) / mean((y - mean(y))^2), 3)
#> [1] 0.695

# Predicted values for the latent categorical feature + missclassification rate
Z0_hat <- predict(kcmeans_fit, cbind(Z, X), clusters = T) - 1
mean((Z0 - Z0_hat)!=0)
#> [1] 0

Finally, it is also straightforward to compute standard errors for the final coefficients, e.g., using summary.lm:

# Compute the linear regression object and call summary.lm
lm_fit <- lm(y ~ as.factor(Z0_hat) + X)
summary(lm_fit)
#> 
#> Call:
#> lm(formula = y ~ as.factor(Z0_hat) + X)
#> 
#> Residuals:
#>     Min      1Q  Median      3Q     Max 
#> -3.1205 -0.6916  0.0544  0.6700  3.4201 
#> 
#> Coefficients:
#>                    Estimate Std. Error t value Pr(>|t|)    
#> (Intercept)         0.03897    0.07434   0.524      0.6    
#> as.factor(Z0_hat)1  0.88393    0.10265   8.611   <2e-16 ***
#> as.factor(Z0_hat)2  1.88314    0.10271  18.334   <2e-16 ***
#> as.factor(Z0_hat)3  3.01094    0.10636  28.310   <2e-16 ***
#> X                   1.04636    0.03541  29.549   <2e-16 ***
#> ---
#> Signif. codes:  0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1
#> 
#> Residual standard error: 1.03 on 795 degrees of freedom
#> Multiple R-squared:  0.6954, Adjusted R-squared:  0.6939 
#> F-statistic: 453.7 on 4 and 795 DF,  p-value: < 2.2e-16

Choice of K via Cross-Validation

Since the cardinality of the support of the underlying low-dimensional latent categorical variable is often unknown, it is useful to consider multiple KCMeans estimators with varying values for K. The below code snippet uses the ddml package to compute the cross-validation mean-square prediction error (MSPE) of three KCMeans estimators (see also ?ddml::crossval for details).

In addition, the KCMeans MSPEs are compared to the MSPE of three alternative conditional expectation function estimators:

Ordinary least squares (see also ?ddml::ols)
Lasso with cross-validated penalty parameter (see also ?ddml::mdl_glmnet)
Ridge with cross-validated penalty parameter

# load the ddml package
library(ddml)

# one-hot encoding for ols, lasso, and ridge
Z_indicators <- model.matrix(~ as.factor(Z)) 

# Combine features and create indices
X_all <- cbind(Z, X, Z_indicators)
indx_factor <- 1:2
indx_indicators <- 2:(2 + ncol(Z_indicators))

# Create the learners, assign indicators to ols, lasso, and ridge
learner_list <- list(list(fun = kcmeans,
                          args = list(K = 2),
                          assign_X = indx_factor),
                     list(fun = kcmeans,
                          args = list(K = 4),
                          assign_X = indx_factor),
                     list(fun = kcmeans,
                          args = list(K = 6),
                          assign_X = indx_factor),
                     list(fun = ols,
                          assign_X = indx_indicators),
                     list(fun = mdl_glmnet,
                          assign_X = indx_indicators),
                     list(fun = mdl_glmnet,
                          args = list(alpha = 0),
                          assign_X = indx_indicators))

# Compute the cross-valdiation MSPE
cv_res <- crossval(y = y, X = X_all, 
                   learners = learner_list, 
                   cv_folds = 20, silent = T)

The results show that KCMeans with K=4 and K=6 achieve the smallest MSPE among the considered estimators.

# Print the results
names(cv_res$mspe) <- c("KCMeans (K=2)", "KCMeans (K=4)", "KCMeans (K=6)",
                        "OLS", "Lasso", "Ridge")
round(cv_res$mspe, 4)
#> KCMeans (K=2) KCMeans (K=4) KCMeans (K=6)           OLS         Lasso 
#>        1.3170        1.0650        1.0655        1.0803        1.0797 
#>         Ridge 
#>        1.0890

# Which learner is the best?
names(which.min(cv_res$mspe))
#> [1] "KCMeans (K=4)"

References

Wiemann T (2023). “Optimal Categorical Instruments.” https://arxiv.org/abs/2311.17021