Multicollinearity, Financial Management

Assignment Help:

 

Multicollinearity

As the degree of correlation between the independent variables increases, the regression coefficients become less reliable. That is, although the independent variables may together explain the dependent variable, but because of multicollinearity the coefficients of the explanatory variables may be rejected. It can happen that the model may be accepted (through ANOVA and the F test), but the individual coefficients may be rejected (through the t test). This is because the interplay among the independent variables reduces the influence of the individual variables in the model. In the extreme case, if two variables are identical, then the influence of each one in the model would be reduced. Multicollinearity does not reduce the accuracy of the model (the predictive powers), but it hurts any sensitivity analysis - if we increase one explanatory variable by one unit, what happens?

This is a subject in itself, but the reader should be aware of the importance of multicollinearity.

Multiple Correlation Coefficients

 

So far we have come across correlation coefficients between two variables X and Y. However in the case of a multiple regression equation like

                   Y = a + b1 X1 + b2 X2

we see that Y can be correlated to both X1 and X2. Hence we can have a coefficient of multiple correlation which will measure the correlation between Y and both X1 and X2.

 

 

 


Related Discussions:- Multicollinearity

What is suspension of payments, Is it possible for a company with a positiv...

Is it possible for a company with a positive net income and which does not distribute dividends to find itself in suspension of payments?  Yes. A lot of companies which entered

Compute the rate of return on investment, Suppose you are a euro-based inve...

Suppose you are a euro-based investor who simply sold Microsoft shares which you had bought six months ago. You had invested 10,000 euros to buy Microsoft shares for $120 each shar

What do you mean by s corporation, Q. What do you mean by S Corporation? ...

Q. What do you mean by S Corporation? S Corporation - An S Corporation is a corporation that, under Internal Revenue Code, is normally not subject to federal income taxes. In i

Explain the structure of financial systems, Explain the structure of financ...

Explain the structure of financial systems In direct finance borrower-spenders borrow funds straight from lenders in the financial markets by selling them securities. In indire

Financial crisis , a)  Tonddu plc is expected to report record earnings of ...

a)  Tonddu plc is expected to report record earnings of £120m next year.  It has grown rapidly over the last few years, the growth has been achieved by maintaining a high level of

Example of securitization, The process of securitization can best be ...

The process of securitization can best be understood by taking the following example. Assume that there exists an NBFC which has hire purchase as its major busine

Commodities exchange, Explain the organization and function of commodities...

Explain the organization and function of commodities exchange

S&p cnx 500, S&P CNX 500 Here, the stocks are included as per their res...

S&P CNX 500 Here, the stocks are included as per their respective market capitalization. It includes companies which lead in their respective industry sector. They should close

Compute the discount and premium, Suppose the bid-ask spot prices for one B...

Suppose the bid-ask spot prices for one British pound are $1.50 and $1.60 respectively. 1. Compute the bid-ask prices for one US dollar in terms of British pound. 2. Suppose

Evaluate the income statement, 2010 equity balance required: (600-20 - 2...

2010 equity balance required: (600-20 - 25 - 15 - 20)= 520 employees eligible Total expected equivalent value = 520 x 500 options x $1.48 = $384,800 $384,800 x 3/4 years = $28

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd