Thursday, June 13, 2013

Understanding Multicollinearity

Roughly speaking, Multicollinearity occurs when two or more regressors are highly correlated. Most of us  know what does it mean, how to detect it and are taught how to cope with it, but not why is it so. From Wikipedia: “In this situation (Multicollinearity) the coefficient estimates may change erratically in response to small changes in the model or the data.” The Wikipedia entry continues to discuss detection, implications and remedies. Here is an attempt to provide the intuition:

No comments:

Post a Comment