The Test Of Multicollinearity Test And Then Generating The First Difference Variables

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For the test of Multicollinearity, I have used the ADF test and then generating the first difference variables and running regression to correct the Multicollinearity. First using the Dicky-Fuller test, the non-stationary variables were separated from the stationary variables. After which, the non-stationary variables were made stationary by using the first difference for these variables and getting them close to the mean. Now, the last step to correct the Multicollinearity was to run regression on the first difference variables. The results for this OLS regression using the first difference variables, we have only 4 significant variables as compared to 8 significant variable in the original regression. From the initial OLS regression,…show more content…
Another variable that is significant is the S&P 500 stock index. It’s significant at 1% significance level. The sign for the estimates is negative, which is similar to the intuitively one would think of. Since, we know that the investors will be investing in the gold whenever they are not confident about the market outlook, so they will be pulling out their investment from the stock market and putting it in the gold market. Which makes sense as the sign of the estimates is negative. Now, to interpret the estimates for S&P 500 variable, we can say that a unit decrease in the stock market will increase the gold price by close to \$1. Which means that there is equal increase in the gold prices as the decrease in the stock market. Treasury inflation indexed securities is another variable that is significant at 1% significance level. Now, since the TIPS are indexed to the inflation, the TIPS will increase whenever there is inflation and decrease when there is deflation. The sign for the variable is negative meaning that a unit increase in the TIPS level will increase the gold prices by \$0.95. Since, the TIPS level is increasing there is inflation and because of that it makes sense that the investors will be investing in the gold market when there is increase in the inflation. Oil prices variable is also significant at 5% significance level. These means that the with a unit increase in the prices of oil future contracts will increase the price of gold by \$.80 cents,