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Re: st: how to test for multicollinearity with xtreg


From   David Jacobs <jacobs.184@sociology.osu.edu>
To   statalist@hsphsun2.harvard.edu
Subject   Re: st: how to test for multicollinearity with xtreg
Date   Mon, 01 Aug 2005 12:33:58 -0400

Since OLS with dummies gives identical estimates to "xtreg, fe" or "areg", you can compute the case-specific (and time-specific if you are including them) dummies perhaps using tab (one way) generate. Then run a standard OLS model with all dummies included and use Stata's regression diagnostics (like VIF).

You should be warned, however. VIF isn't a strong indicator (because it ignores the correlations between the explanatory variables and the dependent variable) and fixed-effects models often generate extremely large VIF scores.

Dave Jacobs

At 06:20 PM 7/29/2005 -0500, you wrote:

Dear STATA listserve,

I'm running regressions on panel data using the xtreg command but the
VIF command does not seem to work. I was wondering if anyone knows of
any STATA commands to test for the presence of multicollinearity as an
option with the xtreg command. Particularly, since there is little
within country variation with one of my variables, but significant
between country estimation, I suspect the fixed effects specification
is causing collinearity with the fixed effect for each cross section
and the variable mentioned above.

I would be extremely grateful for any tips.

Sincerely,
Ross Hanig


--
Department of Agricultural and Consumer Economics
1301 West Gregory Drive
405 Mumford Hall
Urbana, IL 61801
rhanig2@uiuc.edu

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