Business Statistics

548 Business Statistics

Collinearity is measured by the variance inflationary factor (VIF) for each explanatory vari-

able. Variance inflationary factor (VIF) for an explanatory variable i can be defined as

Variance inflationary factor (VIF) is given as

2

1

1

i

i

VIF

R

=

−

where

2

i

R

is the coefficient of multiple determination of explanatory variable x

i

with all other x vari-

ables.

In a multiple regression analysis, if there are only two explanatory variables,

2

1

R

is the coefficient

of multiple determination of explanatory variables x

1

and x

2

. Similarly,

2

2

R

is the coefficient of multiple

determination of explanatory variables x

2

and x

1

(same as

2

1

R