Units of measurement and the inverse hyperbolic sine transformation

The inverse hyperbolic sine (IHS) transformation is frequently applied in econometric studies to transform right-skewed variables that include zero or negative values. We show that regression results can heavily depend on the units of measurement of IHS-transformed variables. Hence, arbitrary choices regarding the units of measurement for these variables can have a considerable effect on recommendations for policies or business decisions. In order to address this problem, we suggest a procedure for choosing units of measurement for IHS-transformed variables. A Monte Carlo simulation assesses this procedure under various scenarios, and an empirical illustration shows the relevance and applicability of our suggested procedure.

Automated summary

In econometric studies, the use of the inverse hyperbolic sine (IHS) transformation to handle right-skewed variables may heavily rely on the choice of units of measurement, which can impact policy or business decisions significantly. To address this issue, a procedure for selecting units of measurement for IHS-transformed variables is proposed and evaluated through Monte Carlo simulation and empirical analysis, demonstrating its relevance and applicability.