18 views

Uploaded by missinu

Multicollinearity

- wp_2010_04_health
- Random Effect Model_Panel Data Case Study
- J. Basic. Appl. Sci. Res., 2(7)7168-7174, 2012_3
- 2
- Coefficientsa Unstandardized Coefficients Model 1 (Constant) Price_roses
- FDI & Industrial Development Paper
- impact of OC on OP.pdf
- SDA 3E Chapter 6 (2)
- IC Disclosure IPO Malaysia
- MB Lecture 9
- 1-B00001
- IMPACT OF THE BOARD ON FINANCIAL PROFITABILITY The Case of Tunisian companies
- Energy Policy
- Answers-Review-Questions-Econometrics.pdf
- 2009-malaysia-Yong Ting Aw† and Tuck Cheong Tang
- Chapter Two - Forces Affecting City Population Growth or Decline
- Multiple Regression
- UT Dallas Sample Syllabus for Chansu Jung
- a safety climate measurement for construction sites
- Factors Affecting on Customer Retention_A Case Study of Cellular Industry of Pakistan-21

You are on page 1of 25

Multicollinearity

All rights reserved.

Washington and Lee University

The next three chapters deal with violations of the Classical

Assumptions and remedies for those violations

This chapter addresses multicollinearity; the next two chapters are

on serial correlation and heteroskedasticity

For each of these three problems, we will attempt to answer the

following questions:

1. What is the nature of the problem?

2. What are the consequences of the problem?

3. How is the problem diagnosed?

4. What remedies for the problem are available?

8-2

Perfect Multicollinearity

no explanatory variable is a perfect linear function of any other explanatory variables

The word perfect in this context implies that the variation in one explanatory

variable can be completely explained by movements in another explanatory

variable

A special case is that of a dominant variable: an explanatory variable is definitionally

related to the dependent variable

X1i = 0 + 1X2i

(8.1)

where the s are constants and the Xs are independent variables in:

Yi = 0 + 1X1i + 2X2i + i

(8.2)

8-3

Figure 8.1

Perfect Multicollinearity

8-4

Perfect Multicollinearity

(cont.)

perfect multicollinearity?

OLS is incapable of generating estimates of the regression coefficients

most OLS computer programs will print out an error message in such a situation

because the perfectly collinear variables cannot be distinguished from each

other:

You cannot hold all the other independent variables in the equation constant if

every time one variable changes, another changes in an identical manner!

Solution: one of the collinear variables must be dropped (they are essentially

identical, anyway)

8-5

Imperfect Multicollinearity

Imperfect multicollinearity occurs when two (or

more) explanatory variables are imperfectly

linearly related, as in:

X1i = 0 + 1X2i + ui

(8.7)

Notice that Equation 8.7 includes ui, a stochastic error

term

2011 Pearson Addison-Wesley. All

8-6

Figure 8.2

Imperfect Multicollinearity

8-7

The Consequences of

Multicollinearity

There are five major consequences of multicollinearity:

1.

2.

will increase:

a. Harder to distinguish the effect of one variable from the

effect of another, so much more likely to make large

errors in estimating the s than without multicollinearity

b. As a result, the estimated coefficients, although still

unbiased, now come from distributions with much larger

variances and, therefore, larger standard errors (this

point is illustrated in Figure 8.3)

8-8

Increases the Variances of the s

8-9

The Consequences of

Multicollinearity (cont.)

3. The computed t-scores will fall:

a. Recalling Equation 5.2, this is a direct consequence of 2. above

a.

will often cause major changes in the values of the s when significant

multicollinearity exists

b.

For example, if you drop a variable, even one that appears to be statistically

insignificant, the coefficients of the remaining variables in the equation

sometimes will change dramatically

c.

effect of one variable from the effect of another

5. The overall fit of the equation and the estimation of the coefficients of

nonmulticollinear variables will be largely unaffected

8-10

The Detection of

Multicollinearity

First realize that that some multicollinearity exists in every equation:

all variables are correlated to some degree (even if completely at

random)

So its really a question of how much multicollinearity exists in an

equation, rather than whether any multicollinearity exists

There are basically two characteristics that help detect the degree of

multicollinearity for a given application:

1. High simple correlation coefficients

2. High Variance Inflation Factors (VIFs)

We will now go through each of these in turn:

8-11

Coefficients

variables is high in absolute value, these two particular Xs are highly

correlated and multicollinearity is a potential problem

Some researchers pick an arbitrary number, such as 0.80

A better answer might be that r is high if it causes unacceptably large

variances in the coefficient estimates in which were interested.

Groups of independent variables, acting together, may cause

multicollinearity without any single simple correlation coefficient being high

enough to indicate that multicollinearity is present

As a result, simple correlation coefficients must be considered to be

sufficient but not necessary tests for multicollinearity

8-12

Factors (VIFs)

The variance inflation factor (VIF) is calculated from two steps:

1.

explanatory variables in the equationFor i = 1, this equation would

be:

X 1 = 1 + 2X 2 + 3X 3 + + KX K + v

(8.15)

(8.16)

where

is the unadjusted

8-13

Factors (VIFs) (cont.)

From Equation 8.16, the higher the VIF, the more severe the effects of

mulitcollinearity

While there is no table of formal critical VIF values, a common rule of thumb is

that if a given VIF is greater than 5, the multicollinearity is severe

this number slightly

Note that the authors replace the VIF with its reciprocal,

tolerance, or TOL

, called

There can still be severe multicollinearity even with small VIFs

VIF is a sufficient, not necessary, test for multicollinearity

8-14

Remedies for

Multicollinearity

Essentially three remedies for multicollinearity:

1. Do nothing:

a. Multicollinearity will not necessarily reduce the t-scores

enough to make them statistically insignificant and/or

change the estimated coefficients to make them differ

from expectations

b. the deletion of a multicollinear variable that belongs in

an equation will cause specification bias

2. Drop a redundant variable:

a. Viable strategy when two variables measure essentially

the same thing

b. Always use theory as the basis for this decision!

8-15

Remedies for

Multicollinearity (cont.)

3. Increase the sample size:

a. This is frequently impossible but a useful alternative

to be considered if feasible

b. The idea is that the larger sample normally will

reduce the variance of the estimated coefficients,

diminishing the impact of the multicollinearity

8-16

Table 8.1a

8-17

Table 8.1a

8-18

Table 8.2a

8-19

Table 8.2b

8-20

Table 8.2c

8-21

Table 8.2d

8-22

Table 8.3a

8-23

Table 8.3b

8-24

Perfect multicollinearity

Severe imperfect multicollinearity

Dominant variable

Auxiliary (or secondary) equation

Variance inflation factor

Redundant variable

8-25

- wp_2010_04_healthUploaded byBruegel
- Random Effect Model_Panel Data Case StudyUploaded byshekharhrss1
- J. Basic. Appl. Sci. Res., 2(7)7168-7174, 2012_3Uploaded byana arimurti
- 2Uploaded byRiski Oktavia Lestari
- Coefficientsa Unstandardized Coefficients Model 1 (Constant) Price_rosesUploaded byjhunni
- FDI & Industrial Development PaperUploaded byUsman Ali
- impact of OC on OP.pdfUploaded byFahim Ahmed
- SDA 3E Chapter 6 (2)Uploaded byxinearpinger
- IC Disclosure IPO MalaysiaUploaded byCecilya Gunawan
- MB Lecture 9Uploaded byrui
- 1-B00001Uploaded byRezza Kanovi
- IMPACT OF THE BOARD ON FINANCIAL PROFITABILITY The Case of Tunisian companiesUploaded byAnonymous vQrJlEN
- Energy PolicyUploaded byraum123
- Answers-Review-Questions-Econometrics.pdfUploaded byJohn Paul Tuohy
- 2009-malaysia-Yong Ting Aw† and Tuck Cheong TangUploaded byquoc huong
- Chapter Two - Forces Affecting City Population Growth or DeclineUploaded byXhorxhIsm
- Multiple RegressionUploaded byShanyaRastogi
- UT Dallas Sample Syllabus for Chansu JungUploaded byUT Dallas Provost's Technology Group
- a safety climate measurement for construction sitesUploaded byKaruna Ramessur
- Factors Affecting on Customer Retention_A Case Study of Cellular Industry of Pakistan-21Uploaded byArvind Sanu Misra
- Gaming Frequency and Academic PerformanceUploaded byAdit Tom
- Rahim Ostvar Et AlUploaded byInternational Journal of Clinical and Biomedical Research (IJCBR)
- Sas +Credit Card ModellingUploaded byAbhisek Mohanty
- 39. Format. Hum - Employment Generation Though PMEGP in Lohit District of Arunachal Pradesh – an AnalysisUploaded byImpact Journals
- hedonicUploaded byNaveen Panta
- ON THE PROBABILITY DISTRIBUTION OF WAVE FORCE AND AN INTRODUCTION TO THE CORRELATION DRAG COEFFICIENT AND THE CORRELATION INERTIAL COEFFICIENT Charles L. BretschneiderUploaded bytyu
- REV2Uploaded byTechKMH
- ConstructionContingency200409Uploaded bySenathirajah Satgunarajah
- Linear RegressionUploaded byrose00flower
- Muñoz & Martín 2018 Fascinatin'Rhythm--and Pauses in Translation Process ResearchUploaded byZogoibi

- Lecture 3 - Linear Methods for ClassificationUploaded bymissinu
- Lecture 2 - Some Course AdminUploaded bymissinu
- Bai Giang Toan C2 (2009)Uploaded bymissinu
- Balabolka SampleUploaded bymissinu
- Lecture 4 - Basis Expansion and RegularizationUploaded bymissinu
- Exam4135 2004 SolutionsUploaded bymissinu
- Exit Questionnaire 2005 FinalUploaded bymissinu
- Economic Accounts 2005 FinalUploaded bymissinu
- Economic Accounts 2005 FinalUploaded bymissinu
- Lecture 1 - Overview of Supervised LearningUploaded bymissinu
- Midterm Microeconomics 1 2012-13Uploaded bymissinu
- AnkiUploaded bymissinu
- Exam ECON301B 2002 CommentedUploaded bymissinu
- Exam ECON301B 2002 CommentedUploaded bymissinu
- Stata RUploaded bymissinu
- Vocabulary IELTS Speaking Theo TopicUploaded byBBBBBBB
- Giai Tich 2 2014 Chuong 5Uploaded bymissinu
- Visual BasicUploaded byxuananh
- GRE VocabularyUploaded byKoksiong Poon
- 3-Vu Trong Khai - Tich Tu Ruong DatUploaded byematn
- Introduction to Microeconomic Theory and GE Theory (2015)Uploaded bymissinu
- Manure Estimates.pdfUploaded bymissinu
- Regulations Livestock in VN SummaryUploaded bymissinu
- Tom Tat Cong Thuc XSTKUploaded byTuấn Lê
- Giao Trinh VBA_GXDUploaded byYumi Ling
- Bai Tap Giai Tich 2 Chuong 2Uploaded bymissinu
- Bai Giang Toan Kinh Te Quang 2012 1171Uploaded bynicksforums
- Thuchanh CH 141030Uploaded bymissinu
- Cuc BVTVUploaded bymissinu

- Autodesk Maya 2014 Certification Roadmap Fall2013-WebUploaded byrao_gsv7598
- Presentation on Speech RecognitionUploaded byaditya_4_sharma
- JSP OverviewUploaded byatommamu
- BstUploaded byDuy Đức Trần
- Daddy Yankee on Apple MusicUploaded byJosé García
- TMV Trading PricelistUploaded byronald s. rodrigo
- Two tireUploaded byMaria Khan
- bizhubPRESS1250SeriesUserGuideAddlInfoUploaded byalex
- Project Report Boram2-FinalUploaded byCarlos Solon S. Guimarães Jr.
- (2) NetworkingGuideUploaded byshareefgs5560
- m.tech Syllabus CseUploaded byAnonymous 1TpYo9xy4
- Verification Manual Russian Code SP 16.13330.2011Uploaded byadc26
- KTET 2012 Question Paper for Category II Code 606 Final MasterUploaded byaglasem
- Ieee Latest 2018-19 Cloud Computing & Networking Java ProjectsUploaded byIgeeks Technologies,Bangalore
- Abb KinematicsUploaded byAndres Auza
- Java 808 SyllabusUploaded byvijaykansara
- Configuring P690 in AIX-EserverUploaded byAlexandre Reis
- Switched Network Project_comp1154Uploaded bypurpleblaze0201
- BS EN 12696_2000 - Cathodic protection of steel in concrete – BSI British StandardsUploaded byAnshul Jain
- Run Book Automation Job Scheduling for IT OperationsUploaded byShrikant Kale
- APP BUILDER ConfiguringCommUploaded bySadot Enrique Castillo Galan
- Ernest Renan What is a Nation PDFUploaded byLinda
- Tickler FileUploaded byJoe Pena
- Service Manual Prs145Uploaded byAngel De Los Santos
- 02_ Integrating Port Community and Regulatory Single Window Systems - Morton, IPCSA, Session 2Uploaded byvenkateswarant
- CMSC 56 Handout 1 - Syntax and Semantics of Propositional LogicUploaded byCK Luna
- Usfos IntroductionUploaded bytarekeee
- PayrollBatchLoader_v4Uploaded byMahesh
- Advantages of Using FunctionsUploaded byXara Jalalkhan
- Quectel GSM MMS at Commands Manual V1.1Uploaded bykalpeshbr