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Creating categories of Continuous Variable

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Creating categories of Continuous Variable

Satyen Dubey
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Dear All,

I am examining the effect of "Y" variable on certain firm financial risk variables. I am using OLS model to do this. My model looks like following.

Firm Risk Variable  = b+ "Y" + other variables

"Y" is a continuous variable and if theory holds should reduce firm risk.

Now i suspect that the effect of "Y" may not be the same for different levels of "Y" e.g. for low values of "Y" the effect could be negative and for high values (very extensive use) the effect could be positive.

To do this analyse I have created 5 dummy variables.
1) "Y"  <= 20% use then 1 otherwise 0
2) 20% < "Y" <= 40% then 1 else 0
3) 40% < "Y" <= 60% then 1 else 0
4) 60% < "Y" <= 80% then 1 else 0
5) "Y"  > 80% use then 1 otherwise 0

After  examine the following model.

Firm Risk Variable  = b+ "Y" *(1)+ "Y" *(2)+ "Y" *(3)+ "Y" *(4)+ "Y" *(5) + other variables

My Questions is:

Is this correct way to do this?

Is there any other way i can examine this?

Thanks in advance.
Thanks & Regards,

Satyen Dubey
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