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Multicollinearity

Presentation on multicollinearity

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Diya 612
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11 views13 pages

Multicollinearity

Presentation on multicollinearity

Uploaded by

Diya 612
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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MULTICOLLINEARITY

Econometrics Continuous Asssessment


By- Vanshika Sonawala
Prisha Babal
Taneesha Chandna
Diya Makker

Submitted to: Dr. Shyma Jose


TABLE OF
CONTENT
ECONOMETRICS PRESENTATION

Introduction to
01
Multicollinearity

Consequences of
02
Multicollinearity

Detection of
03 Multicollinearity

Remedies for
04 multicollinearity
MULTICOLLINEARITY

Multicollinearity is a situation that arises in


regression analysis when two or more of the
independent variables (predictors) are highly
correlated with each other. This basically means that
the independent variables are not independent, but
rather influence each other.
TYPES OF
MULTICOLLINEARITY

PERFECT
Perfect multicollinearity is a statistical issue that arises in
regression analysis when there's an exact linear relationship
between two or more independent variables in your model. This
means you can perfectly predict the value of one variable based
on the value of another.
TYPES OF
MULTICOLLINEARITY

IMPERFECT
Imperfect multicollinearity, unlike its perfect counterpart,
occurs when there's a high degree of correlation between two
or more independent variables in your regression model, but
the correlation is not perfect (meaning the correlation
coefficient isn't exactly 1 or -1).
CONSEQUENCES
OF
MULTICOLLINEARITY
1. Estimates will remain unbiased
2. The variances and standard errors of
the estimates will increase
3. The computed t-scores will fail
4. Estimates will become very sensitive to
changes in specification
5. The overall fit of the equation and the
estimation of coefficients of
nonmulticollinear variables will be
largely unaffected Severe Multicollinearity increases the variances
of βs
ANALYSIS
t-score for disposable income (Ydi) increases
drastically ( from 1.04 to 7.13) when the liquid
assets variable is dropped from the equation

Standard error for Ydi goes from 0. 13 to 0.65


with the inclusion of liquid assets

R-squared is almost the same (0.89) for both


equations
DETECTION OF MULTICOLLINEARITY
High R^2 but few significant t ratios.
High pair-wise correlations among explanatory variables
or regressors.
High partial correlation coefficients.
Significance F test for auxiliary regressions.
VARIANCE INFLATION FACTOR
A statistical technique called the variance inflation
factor (VIF) can detect and measure the amount of
collinearity in a multiple regression model.
VIF is an indicator of the effect that the other
independent variables have on the standard error
of a regression coefficient.

Large VIF values indicate a high degree of


multicollinearity.
A VIF of value more than 10 is considered to be
high.
REMEDIES
FOR MULTICOLLINEARITY

Increase the size of the


Do Nothing Drop A Redundant Variable
Sample
Every Remedy for multicollinearity On occasion, the simple solution of Attempt to increase the size of the
has a drawback of some sort, and dropping one of the multicollinear sample to reduce the degree of
so it happens that doing nothing is variable is a good one. multicollinearity is another way since the
larger sample normally will reduce the
the correct course of action.
variance of the estimated coefficients
reducing effects of multicollinearity.
THANK YOU
FOR YOUR NICE ATTENTION

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