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

Explain dual currency bond, Explain Dual Currency Bond A dual currency ...

Explain Dual Currency Bond A dual currency bond is a straight fixed-rate bond that is issued in one currency and pays coupon interest in that similar currency.  At maturity, th

Example on hedge fund, Q. Example on hedge fund? Hedge Fund enters agre...

Q. Example on hedge fund? Hedge Fund enters agreement to sell HK$ in six month's. At expiration the Hedge Fund requires to buy spot HKD and deliver these against the short futu

Dual-indexed floaters, In dual indexed floaters the coupon rate is a ...

In dual indexed floaters the coupon rate is a fixed rate plus the difference between two reference rates. Purchasers of these securities typically make an assumpt

Describe market value weights, Q. Describe Market Value Weights? Market...

Q. Describe Market Value Weights? Market Value Weights: - As per market worth scheme of weighting the weights to dissimilar sources of finance are assigned on the basis of thei

What is the tolerable error, What is the Tolerable error In addition t...

What is the Tolerable error In addition to looking at material differences individually the auditor must list all the differences (material or not) and consider in total wheth

Straddle strategy, An options strategy by which an investor owns a position...

An options strategy by which an investor owns a position in both a call and put market with the same strike price and expiration date.

Define the tactics of shareholders used after the bid, After the bid Ta...

After the bid Tactics can be undertaken by directors to ensure that their shareholders don't accept the bid, if that is what they desire. Reject Share

Operating cycle, #questionoperating cycle in vegetable growing business in ...

#questionoperating cycle in vegetable growing business in uganda..

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