Skip to content

Problems in Linear Regression and Their Solutions

January 30, 2016
Problem Effect Solution
Heteroskedasticity Incorrect standard errors Use robust standard errors (corrected for conditional heteroskedasticity)
Serial Correlation Incorrect standard errors (additional problems if a lagged value of the dependent variable is used as an independent variable) Use robust standard errors (corrected for serial correlation)
Multicollinearity High R^2 and low t-statistic Remove one or more independent variables may help.
Advertisements

From → Quant

Leave a Comment

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: