ESTIMATION AND ANALYSIS OF REGRESSION COEFFICIENTS WHEN EXPLANATORY VARIABLES ARE CORRELATED

Abstract

In this paper an unconventional method of the principal components regression is adopted for the solution of multicollinearity and an attempt is made to show that by using this technique, some fairly precise estimates of the coefficient are obtained. This attractive property of the principal components regression makes it superior to the OLS method while dealing with the multicollinear data. Comparison between the variance of the OLS- estimates and the principal components regression on income and consumption is made.