ECON321Economic Analysis

Tutorial 9

Multicollinearity

Introduction

• This tutorial shows you how to estimate a multiple regression model in EViews and test for multicollinearity.

• The example is one of the predictors of CEO salaries.o The salaries are measured in thousands of dollar.o Firms’ sales are measured in millions of dollar.o Market value (or market capitalisation) in millions of dollar.o And profits are also measured in millions of dollar.

Multicollinearity

• In sum, the example shows that you have to be careful about judging the individual significance of an explanatory variable in the presence of a high degree of multicollinearity.

• Remember the remedial steps. You can try to:o Drop a variable.o Transform the data.o Estimate a different functional form.o Obtain a different sample.

Now that you know how to test for multicollinearity, the following tutorial will show you how to test for heteroskedasticity.

Save your workfile and continue…