Monday, June 24, 2013

Can You Actually TEST for Multicollinearity?

When you're undertaking a piece of applied econometrics, something that's always on your mind is the need to test the specification of your model, and to test the validity of the various underlying assumptions that you're making. At least - I hope it's always on your mind!

This is an important aspect of any modelling exercise, whether you're working with a linear regression model, or with some nonlinear model such Logit, Probit, Poisson regression, etc. Most people are pretty good when it comes to such testing in the context of the linear regression model. They seem to be more lax once they move away from that framework. That makes me grumpy, but that's not what this particular post is about.

It's actually about a rather silly question that you sometimes encounter, namely: "Have you tested to see if multicollinearity is a problem for your results?"

I'll explain why this isn't really a sensible question, and why the answer to the question in the title for this post is a resounding "No!"