In: Economics
Outline the Variance Inflating Factor (VIF) and explain how it may be used to detect the presence of multicollinearity.
Variance inflation factor (VIF) is a measure of the amount of multicollinearity in a set of multiple regression variables. Mathematically, the VIF for a regression model variable is equal to the ratio of the overall model variance to the variance of a model that includes only that single independent variable. This ratio is calculated for each independent variable. A high VIF indicates that the associated independent variable is highly collinear with the other variables in the model.
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A variance inflation factor (VIF) provides a measure of multicollinearity among the independent variables in a multiple regression model.
Detecting multicollinearity is important because while it does not reduce the explanatory power of the model, it does reduce the statistical significance of the independent variables.
A large VIF on an independent variable indicates a highly collinear relationship to the other variables that should be considered or adjusted for in the structure of the model and selection of independent variable