Which of the following is a drawback of including proxy variables in a regression model?
A)It leads to misspecification analysis.
B)It reduces the error variance.
C)It increases the error variance.
D)It exacerbates multicollinearity.

Question

Quizplus · Accepted Answer

Including proxy variables in a regression model can exacerbate multicollinearity, which occurs when there is a high correlation among predictor variables. This complicates the interpretation of regression coefficients and decreases the precision of the estimates. Therefore, it is important to select proxy variables carefully and consider alternative modeling strategies, such as principal components analysis or ridge regression.

Which of the Following Is a Drawback of Including Proxy