KInh tế ứng dụng_ Lecture 7: Multicollinearity

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KInh tế ứng dụng_ Lecture 7: Multicollinearity

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Collinearity refers to linear relationships between two X variables. Multicollinearity encompasses linear relationships between more than two X variables. Multiple regression is impossible in the presence of perfect collinearity or multicollinearity. If X1 and X2 have no independent variation, we cannot estimate the effects of X1 adjusting for X2 or vice versa. One of the variables must be dropped. This is no loss, since a perfect relationship implies perfect redundancy. Perfect multicollinearity is, however, rarely practice problem. Strong (not perfect) multicollinearity, which permits estimation but makes it less precise, is more common. When the multicollinearity is present, the interpretation of...

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