Scroll Top

# Variance Inflation Factor

## Introduction

Variance Inflation Factor (VIF) measures the intercorrelation among independent variables in a multiple regression model. In mathematical terms, the variance inflation factor for a regression model variable would be the ratio of the overall model variance to the variance of the model with a single independent variable. A high VIF indicates a high correlation between variables.

## Understanding Variance Inflation Factor

A multiple regression model is used in a situation where a person wants to examine the effect of multiple variables on an outcome. Here, the dependent variable would be the outcome that is tested with the independent variables. The independent variables would form inputs into the model.

The existence of high intercorrelation between variables makes them less independent. Thus, intercorrelation between variables in a multiple regression model creates problems in testing the variables. It makes it difficult to determine how much the combination of independent variables impacts the dependent variable or the outcome of the regression model.

Even small changes in the data or in the structure of the regression model can lead to large and, sometimes, erratic changes in the coefficients of variables.

VIF is a statistical tool which helps in testing a regression model for correctness. It tests how the behaviour of an independent variable is altered due to a correlation with other independent variables. Thus, it helps in identifying the severity of the issues to facilitate adjustment to the model.

High intercorrelation between variables may produce results which are not significant statistically. It may also lead to double counting of variables. However, VIF can be used for testing economic data variables.

## Explained with an Illustration

VIF, as a statistical tool, has practical applications for determining the effect of an independent variable on the dependent variable. For example, a person can use the statistical tool of VIF to determine the relationship between the unemployment rate (independent variable) and inflation rate (dependent variable). Here, the person can introduce additional independent variables, such as new initial jobless claims and test the dependence among variables.

### Latest Articles

Clear offers taxation & financial solutions to individuals, businesses, organizations & chartered accountants in India. Clear serves 1.5+ Million happy customers, 20000+ CAs & tax experts & 10000+ businesses across India.

Efiling Income Tax Returns(ITR) is made easy with Clear platform. Just upload your form 16, claim your deductions and get your acknowledgment number online. You can efile income tax return on your income from salary, house property, capital gains, business & profession and income from other sources. Further you can also file TDS returns, generate Form-16, use our Tax Calculator software, claim HRA, check refund status and generate rent receipts for Income Tax Filing.

CAs, experts and businesses can get GST ready with Clear GST software & certification course. Our GST Software helps CAs, tax experts & business to manage returns & invoices in an easy manner. Our Goods & Services Tax course includes tutorial videos, guides and expert assistance to help you in mastering Goods and Services Tax. Clear can also help you in getting your business registered for Goods & Services Tax Law.

Save taxes with Clear by investing in tax saving mutual funds (ELSS) online. Our experts suggest the best funds and you can get high returns by investing directly or through SIP. Download Black by ClearTax App to file returns from your mobile phone.

Cleartax is a product by Defmacro Software Pvt. Ltd.

ISO 27001

Data Center

SSL Certified Site

128-bit encryption