Question
In a multiple regression model, if the inclusion of a
new independent variable significantly changes the coefficient estimates of existing variables but is itself not statistically significant, the model most likely suffers from:Solution
Multicollinearity occurs when independent variables are highly correlated with each other. While "perfect" multicollinearity makes it impossible to calculate OLS estimates at all, "imperfect" multicollinearity makes estimates very sensitive to small changes in the data or model specification. It inflates the standard errors, often making variables appear insignificant even when they are theoretically important.
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