ASSIGNMENT NO # 2,3/16/2019

APPLIED ECONOMICS
SUBMITTED TO
MR, FALAK SHER
SUBMITTED BY
QAISAR SHAHZAD
ROLL NO
BECF15M033
SEMESTER
8TH
DEPARTMENT
ECONOMICS

UNIVERSITY OF SARGODHA
Multicollinearity:
When there is high correlation between independent variable or highly correlated to
each other.
 R square value is high.
 Prob value of t-statistics is insignificant.
 Sign of co-efficient is not according to economic theory.

1) Correlation:
X2 X3 Y

X2 1 0.999 0.857

X3 0.999 1 0.857

Y 0.857 0.857 1

In the above table, we want to check the correlation between X2 & X3. The above
table shows that X2 & X3 is highly co-related to each other (i-e 0.99). The change in the
dependent variable is cause by X2 & X3 i-e 0.99. As results, there is Multicollinearity
problem in the data.

2) Regression:
We run multiple regression in E-views software.

Dependent Variable: Y
Method: Least Squares
Date: 03/16/19 Time: 15:50
Sample: 1 25
Included observations: 25

Variable Coefficient Std. Error t-Statistic Prob.

C 35.86766 19.38717 1.850073 0.0778

X2 -6.326498 33.75096 -0.187446 0.8530
X3 1.789761 8.438325 0.212099 0.8340

R-squared 0.735622 Mean dependent var 169.3680

Adjusted R-squared 0.711587 S.D. dependent var 79.05857
S.E. of regression 42.45768 Akaike info criterion 10.44706
Sum squared resid 39658.40 Schwarz criterion 10.59332
Log likelihood -127.5882 Hannan-Quinn criter. 10.48763
F-statistic 30.60702 Durbin-Watson stat 2.875574
Prob(F-statistic) 0.000000

H0 = high Multicollinearity
H1 = No Multicollinearity
The output of E-views shows that the Prob value of t-Statistic is insignificant. So we accept
HO and reject H1 and there is Multicollinearity problem in the data.
3) Auxiliary Regression:

 X2 = f(X3)

Dependent Variable: X2
Method: Least Squares
Date: 03/16/19 Time: 16:11
Sample: 1 25
Included observations: 25

Variable Coefficient Std. Error t-Statistic Prob.

C -0.117288 0.117251 -1.000310 0.3276

X3 0.250016 0.000164 1521.542 0.0000

R-squared 0.999990 Mean dependent var 159.4320

Adjusted R-squared 0.999990 S.D. dependent var 81.46795
S.E. of regression 0.262305 Akaike info criterion 0.237999
Sum squared resid 1.582488 Schwarz criterion 0.335509
Log likelihood -0.974992 Hannan-Quinn criter. 0.265045
F-statistic 2315090. Durbin-Watson stat 2.082420
Prob(F-statistic) 0.000000

The results of Auxiliary regression shows that R^2 value is too high, which indicate that
there is Multicollinearity problem in the data.

 X3 = f (X2)

Dependent Variable: X3
Method: Least Squares
Date: 03/16/19 Time: 16:16
Sample: 1 25
Included observations: 25

Variable Coefficient Std. Error t-Statistic Prob.

C 0.475455 0.468694 1.014425 0.3209

X2 3.999702 0.002629 1521.542 0.0000

R-squared 0.999990 Mean dependent var 638.1560

Adjusted R-squared 0.999990 S.D. dependent var 325.8492
S.E. of regression 1.049146 Akaike info criterion 3.010449
Sum squared resid 25.31629 Schwarz criterion 3.107959
Log likelihood -35.63062 Hannan-Quinn criter. 3.037494
F-statistic 2315090. Durbin-Watson stat 2.082501
Prob(F-statistic) 0.000000

The results of Auxiliary regression shows that R^2 value (i-e 0.999) is too high, which
indicate that there is Multicollinearity problem in the data.
 4) Omitting Independent Variable (X3):

 Y = f (X2)

Dependent Variable: Y
Method: Least Squares
Date: 03/16/19 Time: 16:21
Sample: 1 25
Included observations: 25

Variable Coefficient Std. Error t-Statistic Prob.

C 36.71861 18.56953 1.977358 0.0601

X2 0.832012 0.104149 7.988678 0.0000

R-squared 0.735081 Mean dependent var 169.3680

Adjusted R-squared 0.723563 S.D. dependent var 79.05857
S.E. of regression 41.56686 Akaike info criterion 10.36910
Sum squared resid 39739.49 Schwarz criterion 10.46661
Log likelihood -127.6138 Hannan-Quinn criter. 10.39615
F-statistic 63.81897 Durbin-Watson stat 2.921548
Prob(F-statistic) 0.000000

When we omit the X3 variable then results of regression shows that Prob value of t-Statistic is
significant and there is no Multicollinearity problem in the data, because we accept H1 and
reject Ho.
 Y = f (X3)

Dependent Variable: Y
Method: Least Squares
Date: 03/16/19 Time: 16:26
Sample: 1 25
Included observations: 25

Variable Coefficient Std. Error t-Statistic Prob.

C 36.60968 18.57637 1.970766 0.0609

X3 0.208034 0.026033 7.991106 0.0000

R-squared 0.735199 Mean dependent var 169.3680

Adjusted R-squared 0.723686 S.D. dependent var 79.05857
S.E. of regression 41.55758 Akaike info criterion 10.36866
Sum squared resid 39721.74 Schwarz criterion 10.46617
Log likelihood -127.6082 Hannan-Quinn criter. 10.39570
F-statistic 63.85778 Durbin-Watson stat 2.916396
Prob(F-statistic) 0.000000
When we omit the X2 variable then results of regression shows that Prob value of t-Statistic is
significant and there is no Multicollinearity problem in the data, because we accept H1 and
reject Ho.