Variance Inflation Factor

DEFINITION of 'Variance Inflation Factor'

A measure of the amount of multicollinearity in a set of multiple regression variables. The presence of multicollinearity within the set of independent variables can cause a number of problems in the understanding the significance of individual independent variables in the regression model. Using variance inflation factors helps to identify multicollinearity issues so that the model can be adjusted.

BREAKING DOWN 'Variance Inflation Factor'

The variance inflation factor allows a quick measure of how much a variable is contributing to the standard error in the regression. When significant multicollinearity issues exist, the variance inflation factor will be very large for the variables involved. After these variables are identified, there are several approaches that can be used to eliminate or combine collinear variables, resolving the multicollinearity issue.

RELATED TERMS
  1. Multicollinearity

    In statistics, the occurrence of several independent variables ...
  2. Regression

    A statistical measure that attempts to determine the strength ...
  3. Stepwise Regression

    The step-by-step iterative construction of a regression model ...
  4. Sensitivity Analysis

    Sensitivity analysis is a technique used to determine how different ...
  5. Variability

    The extent to which data points in a statistical distribution ...
  6. Heteroskedastic

    A measure in statistics that refers to the variance of errors ...
Related Articles
  1. Markets

    Understanding Regression

    Regression is a statistical analysis that attempts to predict the effect of one or more variables on another variable.
  2. Trading

    What's a Sensitivity Analysis?

    Sensitivity analysis is used in financial modeling to determine how one variable (the target variable) may be affected by changes in another variable (the input variable).
  3. Markets

    Explaining Variance

    Variance is a measurement of the spread between numbers in a data set.
  4. Trading

    Using Trading Indicators Effectively

    Select multiple indicators, avoid information overload and optimize indicators to effectively use technical analysis tools.
  5. Retirement

    Variable Annuity Basics

    Find out how variable annuities can help you plan for retirement by offering the returns of the stock market with the guarantee of insurance.
  6. Managing Wealth

    Calculating Portfolio Variance

    Portfolio variance is a measure of a portfolio’s volatility, and is a function of two variables.
  7. Markets

    Stock and Flow Variables Explained: A Closer Look at Apple

    The difference between stock and flow variables is an essential concept in finance and economics. We illustrate with financial statements from Apple Inc.
  8. Financial Advisor

    Variable Annuities: The Pros and Cons

    Variable annuities are one of the most complicated financial instruments. Here is an in depth look at their pros and cons.
  9. Markets

    What's a Regressive Tax?

    A regressive tax is a levy in a tax system where the tax rate does not change based on the level of income.
  10. Retirement

    Variable Annuities: The Good, The Bad and the Ugly

    An in-depth guide to everything you need to know and watch out for with variable annuities.
RELATED FAQS
  1. What is the difference between linear regression and multiple regression?

    Learn the difference between linear regression and multiple regression and how multiple regression encompasses not only linear ... Read Answer >>
  2. What are some of the more common types of regressions investors can use?

    Learn about the most common types of regressions investors use to model asset prices including linear regressions and multiple ... Read Answer >>
  3. What variables are most important when making a prediction through sensitivity analysis?

    Explore sensitivity analysis and how this method considers different variables to determine a course of action based on statistical ... Read Answer >>
  4. How can I use a regression to see the correlation between prices and interest rates?

    Learn how to use linear regression to calculate the correlation between stock prices and interest rates by taking the square ... Read Answer >>
  5. Which is wiser, rolling over my traditional IRA to variable annuity or vice versa? ...

    I am 46 years old. I have a traditional IRA and Variable Annuity. What will it cost me to roll either way? ... Read Answer >>
  6. How can I run linear and multiple regressions in Excel?

    Learn the steps involved in running a regression in Microsoft Excel: preparations, uploading data and using the regression ... Read Answer >>
Hot Definitions
  1. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  2. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  3. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  4. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  5. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  6. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
Trading Center