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Addressing multicollinearity in regression models: a ridge regression application

Author

Listed:
  • Bager, Ali
  • Roman, Monica
  • Algedih, Meshal
  • Mohammed, Bahr

Abstract

The aim of this paper is to determine the most important macroeconomic factors which affect the unemployment rate in Iraq, using the ridge regression method as one of the most widely used methods for solving the multicollinearity problem. The results are compared with those obtained with the OLS method, in order to produce the best possible model that expresses the studied phenomenon. After applying indicators such as the condition number (CN) and the variance inflation factor (VIF) in order to detect the multicollinearity problem and after using R packages for simulations and computations, we have proven that in Iraq, as an Arabic developing economy, unemployment seems to be significantly affected by investments, working population size and inflation.

Suggested Citation

  • Bager, Ali & Roman, Monica & Algedih, Meshal & Mohammed, Bahr, 2017. "Addressing multicollinearity in regression models: a ridge regression application," MPRA Paper 81390, University Library of Munich, Germany, revised Jun 2017.
    • Handle: RePEc:pra:mprapa:81390
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    References listed on IDEAS

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    1. Jaba, Elisabeta & Balan, Christiana & Roman, Mihai & Roman, Monica, 2010. "Statistical evaluation of spatial concentration of unemployment by gender," MPRA Paper 25161, University Library of Munich, Germany, revised May 2010.
    2. Jaba, Elisabeta & Balan, Christiana & Roman, Monica & Viorica, Daniela & Roman, Mihai, 2008. "Employment rate prognosis on the basis of the development environment trend displayed by years-clusters," MPRA Paper 20337, University Library of Munich, Germany, revised Sep 2008.
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    Cited by:

    1. Ali Sadiq Mohommed BAGER & Bahr Kadhim MOHAMMED & Hajem Ati Daham & Sadiq AL-HUSSEINY, 2019. "The Stepwise Regression Model For Study The Unemployment Rate In Iraq," Proceedings of the INTERNATIONAL MANAGEMENT CONFERENCE, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 13(1), pages 811-815, November.

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    More about this item

    Keywords

    multicollinearity; ridge regression method; unemployment rate.;
    All these keywords.

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • J64 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - Unemployment: Models, Duration, Incidence, and Job Search

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