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APPLICATION OF RIDGE REGRESSION TO MULTICOLLINEAR DATA
G. R. Pasha1 and Muhammad Akbar Ali Shah2
Abstract: The main thrust of this paper is to investigate the ridge regression problem in multicollinear data. The properties of ridge estimator are discussed. Variance inflation factors, eigen values and standardization problem are studied through an empirical comparison between OLS and ridge regression method by regressing number of persons employed on five variables. Methods to choose biasing parameter K are also presented.
Keywords: Biasing parameter, eigen values, inflation factors, multicollinearity, Ridge regression, standardization.