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. Autoregressive

    A stochastic process used in statistical calculations in which ...
  5. Regression

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

    A type of mathematical analysis involving the use of quantified ...
Related Articles
  1. Can something as simple as a coin toss be effectively applied to the market?
    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. Personal Finance

    What is the average salary for an accountant?

    Learn about the average salaries of various accounting positions, and see the difference that an accounting degree makes in attaining higher wages.
  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. Economics

    Is the Bureau of Labor Statistics accurate?

    Read this brief analysis of the accuracy of Bureau of Labor Statistics, including a summary of the types of reports issued and how they are compiled.
  9. Economics

    Where is cost of living lowest in the world?

    Learn how the cost of living is the lowest in India based on numbers derived from the CPI and organizations like Expatistan and Numbeo.
  10. 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.

You May Also Like

Hot Definitions
  1. Deferred Revenue

    Advance payments or unearned revenue, recorded on the recipient's balance sheet as a liability, until the services have been ...
  2. Multinational Corporation - MNC

    A corporation that has its facilities and other assets in at least one country other than its home country. Such companies ...
  3. SWOT Analysis

    A tool that identifies the strengths, weaknesses, opportunities and threats of an organization. Specifically, SWOT is a basic, ...
  4. Simple Interest

    A quick method of calculating the interest charge on a loan. Simple interest is determined by multiplying the interest rate ...
  5. Special Administrative Region - SAR

    Unique geographical areas with a high degree of autonomy set up by the People's Republic of China. The Special Administrative ...
  6. Annual Percentage Rate - APR

    The annual rate that is charged for borrowing (or made by investing), expressed as a single percentage number that represents ...
Trading Center