Answer: IV only

## Explanation Perfect multicollinearity occurs in scenario **IV only**. **Analysis of each scenario:** **I. Only one seasonal dummy that is equal to 1** - This creates a single dummy variable - No multicollinearity issue since there's only one variable **II. A holiday variation variable that accounts for an "Easter dummy variable"** - This is a single dummy variable for Easter - No multicollinearity issue **III. A trading-day variation variable for modeling trading volume throughout the year** - This is typically a continuous variable or multiple dummies - No inherent multicollinearity **IV. A dummy variable for each season, plus an intercept** - **This creates perfect multicollinearity** - If you have 4 seasons and create 4 dummy variables plus an intercept, the sum of all dummy variables equals 1 (the constant vector) - This creates a linear dependency: D₁ + D₂ + D₃ + D₄ = 1 - The intercept is perfectly collinear with the sum of the dummy variables **Solution to avoid multicollinearity:** - Either omit one dummy variable (use 3 dummies + intercept) - Or omit the intercept and use all 4 dummies This is known as the **dummy variable trap**.

Author: LeetQuiz Editorial Team