Multicollinearity

AAA

DEFINITION of 'Multicollinearity'

In statistics, the occurrence of several independent variables in a multiple regression model are closely correlated to one another. Multicollinearity can cause strange results when attempting to study how well individual independent variables contribute to an understanding of the dependent variable. In general, multicollinearity can cause wide confidence intervals and strange P values for independent variables.

INVESTOPEDIA EXPLAINS 'Multicollinearity'

Multicollinearity suggests that several of the independent variables are closely linked in some way. Once the collinear variables are identified, it may be helpful to study whether there is a causal link between the variables. The simplest way to resolve multicollinearity problems is to reduce the number of collinear variables until there is only one remaining out of the set. Sometimes, after some study it may be possible to identify one of the variables as being extraneous. Alternatively, it may be possible to combine two or more closely related variables into a single input.

RELATED TERMS
  1. Nonlinearity

    A relationship which cannot be explained as a linear combination ...
  2. Variance Inflation Factor

    A measure of the amount of multicollinearity in a set of multiple ...
  3. Statistical Significance

    A result that is not likely to occur randomly, but rather is ...
  4. Statistics

    A type of mathematical analysis involving the use of quantified ...
  5. Regression

    A statistical measure that attempts to determine the strength ...
  6. Autoregressive

    A stochastic process used in statistical calculations in which ...
Related Articles
  1. Investing Basics

    What Are The Odds Of Scoring A Winning Trade?

    Just because you're on a winning streak doesn't mean you're a skilled trader. Find out why.
  2. Home & Auto

    Insure Your Future With A Career As An Actuary

    If you've got excellent math skills, they can add up to a lucrative career as an actuary.
  3. Investing Basics

    Regression Basics For Business Analysis

    This tool is easy to use and can provide valuable information on financial analysis and forecasting. Find out how.
  4. Active Trading

    The Linear Regression Of Time and Price

    This investment strategy can help investors be successful by identifying price trends while eliminating human bias.
  5. Budgeting

    The P/E Ratio: A Good Market-Timing Indicator

    Check out the returns this newer technical analysis tool would've yielded over the period from 1920 to 2003.
  6. Investing

    How to Use Stratified Random Sampling

    Stratified random sampling is a technique best used with a sample population easily broken into distinct subgroups. Samples are then taken from each subgroup based on the ratio of the subgroup’s ...
  7. Fundamental Analysis

    Lognormal and Normal Distribution

    When and why do you use lognormal distribution or normal distribution for analyzing securities? Lognormal for stocks, normal for portfolio returns.
  8. Investing Basics

    Using Normal Distribution Formula To Optimize Your Portfolio

    Normal or bell curve distribution can be used in portfolio theory to help portfolio managers maximize return and minimize risk.
  9. Technical Indicators

    The Normal Distribution Table, Explained

    The normal distribution formula is based on two simple parameters - mean and standard deviation
  10. Economics

    Can Investors Trust Official Statistics?

    The official statistics in some countries need to be taken with a grain of salt. Find out why you should be skeptical.

You May Also Like

Hot Definitions
  1. Fixed Cost

    A cost that does not change with an increase or decrease in the amount of goods or services produced. Fixed costs are expenses ...
  2. Subsidy

    A benefit given by the government to groups or individuals usually in the form of a cash payment or tax reduction. The subsidy ...
  3. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  4. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  5. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  6. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
Trading Center