Question

IV. (7pts) You are given the following model: reject = β0 + Aobrat + β2Pubrec + β3atotinc + Aloanprc + ßsobrat. pubrec + u in which: veer = l if loan is rejected, and 0 if not. obrat-other obligations, as % of total income pubrec 1 if ever filed for bankruptcy atotinc total monthly income loanpre loan amount /purchase price obrat,pubrec obrat pubrec From the model above, what sign do you expect from each partial slope coefficient in the a. model above? Justify your answers.(2pts) From the estimation of model above, one can obtain the following: reject =-2.35e-o1 + 5.6e-03obrat + 4.1 e-oipubrec + 9.95e-07atotinc + 1.9e-olloanprc -2.67e-03 obrat.pubrec 1989 R-squared -0.107 b. Provide an interpretation of each partial slope estimate (5pts)

Answer 1

a) The model is to find whether the application was accepted or rejected, and 1 indicates the application being rejected. Any factor that whose higher value leads to the application being rejected will have a positive coefficient. i.e. higher the value, higher the chance of rejection of the loan.

From the given factors, obrat (other obligations), pubrec(ever filed for bankruptcy), loanprc (loan amount/purchase price) and obrat.purec (obrat*pubrec) will have a positive influence on loan application being rejected and hence their coefficient should be "positive". Also, a higher monthly income indicates the ability to repay the loan and thus loan application not being rejected. Hence its coefficient should be negative.

b) The coefficient of the independent varaible indicates the rate of change of the dependent variable when the depenent variable changes by a unit.

Hence, considering all other variables remain constant, if the obrat (other obligation) is higher by 1% then the Reject will have additional 5.6e^-3 contribution in being rejected.

Considering all other variables remain constant, if pubrec is 1 then it contributes to additional 4.1e^-01 in favor of loan being rejected compared to the value is zero.

Similarly, loanprc contributes to 1.9e01 and atotinc to 9,95e^-07 with each incremental value in the loan application being rejected.

However, obrat.pubrec has a negative influence. This means that if obrat.pubrec value increased by 1 then the value loan being rejected decreases by 2.67e^-03