Question 6: Consider the data in the attached spreadsheet (Tab2). A finance exec

Question

Question 6: Consider the data in the attached spreadsheet (Tab2). A finance executive would like to etermine dependent variables: total assets (in $ billions), previous period's EPS, previous period's return on assets (ROA), and previous period's return on equity (ROE) if a relationship exists between the current earnings per share (EPS) of a bank and the following a. Check for the presence of multicollinearity. b. If multicollinearity is present, take the necessary steps to eliminate it. c. Perform a step-wise regression analysis using alpha -.

Explanation / Answer

Since, the data is not shared, I can only comment about how to check for multicollinearity.

Plot the correlation matrix for all the independent variables.

For pairs for which the mod of correlation is greater than 0.5, these pairs are highly correlated.

Choose any one of these pairs and re-run the model.

Now again re-run the model by choosing the 2nd of the pair. Compare both the models and choose the best model on the basis of R Square and Adjusted R Square.

Another way of testing for multicolinearity is to get the VIF values for each coeffieicnt. If for any coeffiecient is greater than 5, then the model suffers from multicolinearity.

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