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Multicollinearity (WEDC)

October 9, 2015

What is it?

  • Two or more independent variables are correlated.

Effect?

  • Coefficients are consistent (but unreliable).
  • Standard errors are overestimated.
  • Too many Type II errors

Detection?

  • Conflicting t and F statistics; correlations among independent variables if K=2

Correction?

  • Drop one of the correlated variables
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From → Quant

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