Multicollinearity
Multicollinearity is the violation of classical assumption that no independent variable is a linear function of one or more other independent variables. Multicollinearity can be either perfect or imperfect. Perfect versus Imperfect Multicollinearity Perfect Multicollinearity Perfect multicollinearity violates the classical assumption that no explanatory variable is perfectly linear function of any other explanatory variables. the word perfect in this context implies that the changes in one explanatory variable can be completely explained by movements in another explanatory variable. such a perfect linear relationship between two independent variable would be Xi = a0 + a1 X2i (1) Where the 'a' s are constants and the Xs are independent variables in Yi = b0 + b1X1i + b2X2i + ui. (2) Notice that there is...