Tut9 multicollinearity

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Explains issues of multicollinearity for your econometric model

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Tut9 multicollinearity

  1. 1. ECON321 Economic Analysis Tutorial 9 Multicollinearity
  2. 2. Introduction <ul><li>This tutorial shows you how to estimate a multiple regression model in EViews and test for multicollinearity. </li></ul><ul><li>The example is one of the predictors of CEO salaries. </li></ul><ul><ul><li>The salaries are measured in thousands of dollar. </li></ul></ul><ul><ul><li>Firms’ sales are measured in millions of dollar. </li></ul></ul><ul><ul><li>Market value (or market capitalisation) in millions of dollar. </li></ul></ul><ul><ul><li>And profits are also measured in millions of dollar. </li></ul></ul>
  3. 12. Multicollinearity <ul><li>In sum, the example shows that you have to be careful about judging the individual significance of an explanatory variable in the presence of a high degree of multicollinearity. </li></ul><ul><li>Remember the remedial steps. You can try to: </li></ul><ul><ul><li>Drop a variable. </li></ul></ul><ul><ul><li>Transform the data. </li></ul></ul><ul><ul><li>Estimate a different functional form. </li></ul></ul><ul><ul><li>Obtain a different sample. </li></ul></ul>
  4. 13. <ul><li>Now that you know how to test for multicollinearity, the following tutorial will show you how to test for heteroskedasticity. </li></ul><ul><li>Save your workfile and continue… </li></ul>

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