Variance inflation factor

In statistics, the variance inflation factor (VIF) is the ratio (quotient) of the variance of a parameter estimate when fitting a full model that includes other parameters to the variance of the parameter estimate if the model is fit with only the parameter on its own.^[1] The VIF provides an index that measures how much the variance (the square of the estimate's standard deviation) of an estimated regression coefficient is increased because of collinearity.

The VIF is often used to quantify the severity of multicollinearity in an ordinary least squares regression analysis, but it can be highly misleading in this regard (See "Use of the VIF in Empirical Practice" section below for details and references).

Cuthbert Daniel claims to have invented the concept behind the variance inflation factor, but did not come up with the name.^[2]

Definition

Consider the following linear model with k independent variables:

Y = β₀ + β₁ X₁ + β₂ X ₂ + ... + β_k X_k + ε.

The standard error of the estimate of β_j is the square root of the j + 1 diagonal element of s²(X′X)⁻¹, where s is the root mean squared error (RMSE) (note that RMSE² is a consistent estimator of the true variance of the error term, $\sigma ^{2}$ ); X is the regression design matrix — a matrix such that X_{i, j+1} is the value of the j^th independent variable for the i^th case or observation, and such that X_i,1, the predictor vector associated with the intercept term, equals 1 for all i. It turns out that the square of this standard error, the estimated variance of the estimate of β_j, can be equivalently expressed as:^[3]^[4]

{\widehat {\operatorname {var} }}({\hat {\beta }}_{j})={\frac {s^{2}}{(n-1){\widehat {\operatorname {var} }}(X_{j})}}\cdot {\frac {1}{1-R_{j}^{2}}},

where R_j² is the multiple R² for the regression of X_j on the other covariates (a regression that does not involve the response variable Y). This identity separates the influences of several distinct factors on the variance of the coefficient estimate:

s²: greater scatter in the data around the regression surface leads to proportionately more variance in the coefficient estimates
n: greater sample size results in proportionately less variance in the coefficient estimates
${\widehat {\operatorname {var} }}(X_{j})$ : greater variability in a particular covariate leads to proportionately less variance in the corresponding coefficient estimate

The remaining term, 1 / (1 − R_j²) is the VIF. It reflects all other factors that influence the uncertainty in the coefficient estimates. The VIF equals 1 when the vector X_j is orthogonal to each column of the design matrix for the regression of X_j on the other covariates. By contrast, the VIF is greater than 1 when the vector X_j is not orthogonal to all columns of the design matrix for the regression of X_j on the other covariates. Finally, note that the VIF is invariant to the scaling of the variables (that is, we could scale each variable X_j by a constant c_j without changing the VIF).

{\widehat {\operatorname {var} }}({\hat {\beta }}_{j})=s^{2}[(X^{T}X)^{-1}]_{jj}

Now let $r=X^{T}X$ , and without losing generality, we reorder the columns of X to set the first column to be $X_{j}$

r^{-1}={\begin{bmatrix}r_{j,j}&r_{j,-j}\\r_{-j,j}&r_{-j,-j}\end{bmatrix}}^{-1}

r_{j,j}=X_{j}^{T}X_{j},r_{j,-j}=X_{j}^{T}X_{-j},r_{-j,j}=X_{-j}^{T}X_{j},r_{-j,-j}=X_{-j}^{T}X_{-j}

.

By using Schur complement, the element in the first row and first column in $r^{-1}$ is,

r_{1,1}^{-1}=[r_{j,j}-r_{j,-j}r_{-j,-j}^{-1}r_{-j,j}]^{-1}

Then we have,

{\begin{aligned}&{\widehat {\operatorname {var} }}({\hat {\beta }}_{j})=s^{2}[(X^{T}X)^{-1}]_{jj}=s^{2}r_{1,1}^{-1}\\={}&s^{2}[X_{j}^{T}X_{j}-X_{j}^{T}X_{-j}(X_{-j}^{T}X_{-j})^{-1}X_{-j}^{T}X_{j}]^{-1}\\={}&s^{2}[X_{j}^{T}X_{j}-X_{j}^{T}X_{-j}(X_{-j}^{T}X_{-j})^{-1}(X_{-j}^{T}X_{-j})(X_{-j}^{T}X_{-j})^{-1}X_{-j}^{T}X_{j}]^{-1}\\={}&s^{2}[X_{j}^{T}X_{j}-{\hat {\beta }}_{*j}^{T}(X_{-j}^{T}X_{-j}){\hat {\beta }}_{*j}]^{-1}\\={}&s^{2}{\frac {1}{\mathrm {RSS} _{j}}}\\={}&{\frac {s^{2}}{(n-1){\widehat {\operatorname {var} }}(X_{j})}}\cdot {\frac {1}{1-R_{j}^{2}}}\end{aligned}}

Here ${\hat {\beta }}_{*j}$ is the coefficient of regression of dependent variable $X_{j}$ over covariate $X_{-j}$ . $\mathrm {RSS} _{j}$ is the corresponding residual sum of squares.

Calculation and analysis

We can calculate k different VIFs (one for each X_i) in three steps:

Step one

First we run an ordinary least square regression that has X_i as a function of all the other explanatory variables in the first equation.
If i = 1, for example, equation would be

X_{1}=\alpha _{0}+\alpha _{2}X_{2}+\alpha _{3}X_{3}+\cdots +\alpha _{k}X_{k}+\varepsilon

where $\alpha _{0}$ is a constant and $\varepsilon$ is the error term.

Step two

Then, calculate the VIF factor for ${\hat {\beta }}_{i}$ with the following formula :

\mathrm {VIF} _{i}={\frac {1}{1-R_{i}^{2}}}

where R²_i is the coefficient of determination of the regression equation in step one, with $X_{i}$ on the left hand side, and all other predictor variables (all the other X variables) on the right hand side.

Step three

Analyze the magnitude of multicollinearity by considering the size of the $\operatorname {VIF} ({\hat {\beta }}_{i})$ . A rule of thumb is that if $\operatorname {VIF} ({\hat {\beta }}_{i})>10$ then multicollinearity is high^[5] (a cutoff of 5 is also commonly used^[6]). However, there is no value of VIF greater than 1 in which the variance of the slopes of predictors isn't inflated. As a result, including two or more variables in a multiple regression that are not orthogonal (i.e. have correlation = 0), will alter each other's slope, SE of the slope, and P-value, because there is shared variance between the predictors that can't be uniquely attributed to any one of them.

Some software instead calculates the tolerance which is just the reciprocal of the VIF. The choice of which to use is a matter of personal preference.

Interpretation

The square root of the variance inflation factor indicates how much larger the standard error increases compared to if that variable had 0 correlation to other predictor variables in the model.

Example
If the variance inflation factor of a predictor variable were 5.27 (√5.27 = 2.3), this means that the standard error for the coefficient of that predictor variable is 2.3 times larger than if that predictor variable had 0 correlation with the other predictor variables.

Use of the VIF in Empirical Practice

Empirical researchers who report VIF scores in the context of ordinary least squares regression near-universally state that their VIF scores are below a numerical rule-of-thumb threshold, as per Step 3 of the "Calculation and Analysis" section above. The objective is to boost confidence in statistically significant results in the presence of multicollinearity. ^[7]

Yet, on the one hand, if all Gauss-Markov assumptions, as stated in econometrics, are satisfied, then statistical significance is sufficiently credible and reporting VIF scores is superfluous. ^[8]^[9]

On the other hand, a regression that falls afoul of the Gauss-Markov assumptions, either by omitting a relevant variable or common factor correlated with included variables, is susceptible to multicollinearity-induced inflation of omitted-variable bias^[10]^[11] and type 1 error,^[12] leading to the possibility of type 1 errors even when VIF scores are far below thresholds.^[13]^[14]

Implementation

vif function in the car R package
ols_vif_tol function in the olsrr R package
PROC REG in SAS System
variance_inflation_factor function in statsmodels Python package
estat vif in Stata
r.vif addon for GRASS GIS

References

↑ James, Gareth; Witten, Daniela; Hastie, Trevor; Tibshirani, Robert (2017). An Introduction to Statistical Learning (8th ed.). Springer Science+Business Media New York. ISBN 978-1-4614-7138-7.
↑ Snee, Ron (1981). Origins of the Variance Inflation Factor as Recalled by Cuthbert Daniel (Technical report). Snee Associates.
↑ Rawlings, John O.; Pantula, Sastry G.; Dickey, David A. (1998). Applied regression analysis : a research tool (Second ed.). New York: Springer. pp. 372, 373. ISBN 0387227539. OCLC 54851769.
↑ Faraway, Julian J. (2002). Practical Regression and Anova using R (PDF). pp. 117, 118.
↑ Kutner, M. H.; Nachtsheim, C. J.; Neter, J. (2004). Applied Linear Regression Models (4th ed.). McGraw-Hill Irwin.
↑ Sheather, Simon (2009). A modern approach to regression with R. New York, NY: Springer. ISBN 978-0-387-09607-0.
↑ Kalnins, Arturs; Praitis Hill, Kendall (2023). "The VIF Score. What is it Good For? Absolutely Nothing". Organizational Research Methods: 1–18. doi:10.1177/10944281231216381.
↑ O’Brien, R. M. (2007). "A Caution Regarding Rules of Thumb for Variance Inflation Factors". Quality & Quantity. 41 (5): 673–690. doi:10.1007/s11135-006-9018-6. S2CID 28778523.
↑ Lindner, Thomas; Puck, Jonas; Verbeke, Alain (2020). "Misconceptions about multicollinearity in international business research: Identification, consequences, and remedies". Journal of International Business Studies. 51: 283–298. doi:10.1057/s41267-019-00257-1. ISSN 0047-2506.
↑ Middleton, Joel; Scott, Marc; Diakow, Ronli; Hill, Jennifer (2016). "Bias amplification and bias unmasking". Political Analysis. 24 (3): 307–323. doi:10.1093/pan/mpw015.
↑ Winship, Chris; Western, Bruce (2016). "Multicollinearity and model misspecification" (PDF). Sociological Science. 3: 627–649. doi:10.15195/v3.a27.
↑ Kalnins, Arturs (2018). "Multicollinearity: How common factors cause Type 1 errors in multivariate regression". Strategic Management Journal. 39 (8): 2362–2385. doi:10.1002/smj.2783.
↑ Kalnins 2018
↑ Kalnins & Praitis Hill, 2023