8.8 Multicollinearity

  • Occurs when some of the X variables are highly intercorrelated.
  • Affects estimates and their SE’s (p. 143)
  • Look at tolerance, and its inverse, the Variance Inflation Factor (VIF)
  • Need tolerance < 0.01, or VIF > 100.
  • Solution: use variable selection to delete some X variables.
  • Alternatively, use dimension reduction techniques such as Principal Components