# 8.) Multicollinearity Flashcards

Strictly speaking, perfect multicollinearity is the..

violation of Classical Assumption VI - that no independent variable is a perfect linear function of one or more other independent variables.

Recall that the coefficient betak can be thought of as…

the impact on the dependent variable of a one-unit increase in the independent variable Xk holding constant the other independent variables in the equations.

Perfect multicollinearity violates …

Classical Assumption VI, which specifies that no explanatory variable is a perfect linear function of any other variable.

A perfect linear function has all data points..

on the same straight line.

Perfect multicollinearity ruins our ability to…

estimate the coefficients because the two variables cannot be distinguished.

Dominant Variable

is by definition related so highly correlated with the independent variable that it completely masks the effects of all other independent variables in the equation.

Dominant variables should be recognized as..

being virtually identical to the dependent variable.

imperfect Multicolinearity can be defined as…

a linear functional relationship between two or more independent variable that is so strong that it can significantly affect the estimation of the coefficients of the variable

What are the consequences of multicolinearity?

- ) Estimates will remain unbiased.
- ) The variances and standard errors of the estimates will increase.
- ) The computed t-scores will fall.
- ) Estimates will become very sensitive to changes in specification.
- ) The overall fit of the equation and the estimation of the coefficients of multicollinear variables will be largely unaffected.

The main purpose in discussing multicollinearity is to learn to determine…

how much multicolinearity exists in an equation, not whether any multicolinearity exists.

The severity of multicollinearity in a given equation can change from sample to sample …

depending on the characteristics of the sample

The trick is to find variables that are…

theoretically relevant (for meaningful interpretation) and that are also statistically nonmulticolinear (for meaningful inference)

Are there accepted tests to find multicolinearity?

No, there are none.

The use of simple correlation coefficients as an indication of the extent of multicolinearity involves..

a major limitation if there are more than two explanatory variables.

r is high if..

it causes unacceptably large variances in the coefficient estimates in which we’re interested.