Question

You are given the following model:

appr = B0 + B1 loanprc + B2atotinc + B3atotinc.sq. + B4obrat + B5pubrec + u,

in which:

- approve: = 1 if loan is approved, and 0 if not

- obrat: other oblications, % of total income

- pubrec: = 1 if filed for bankruptcy

- atotinc: Total monthly income

- loanprc: loan amount/ purchase price

- atotinc.sq. = atotinc*atotine

a. What sign would you expect from each partial slope coefficient in the model above? Justify your answers.

From the estimation of model above, one can obtain the following:

appr = 1.2 - 0.189loanprc + 1.7e^-06atotinc - 4.3e^-11atotinc² - 0.0054obrat - 0.28pubrec

  (0.04) (0.038) (2.7e^-06) (5.6e^-11)    (0.00088) (0.0358)

R^{2 =} 0.1087 n=1989

b. Interpret the coefficients of pubrec, and of loanprc.

c. How do you explain the signs of atotinc and atotinc²?

Answer 1

Answer) a)

B1 = Negative, as higher the loan amount, then lower the chances of approval

B2 = Positive, as higher the monthly income , the higher the chances of approval

B3 = Positive, for the same reason as for atotinc, i.e. B2

B4 = Negative, as if the other obligations are large, then there is a low chance of approval.

B5 = Negative, as if the person have filed for bankruptcy then the chances of approval are less.

b)

The coefficient of pubrec means that if the person has filed for bankruptcy, then there is a deduction of 0.28 in the appr variable value, loanprc means that 0.189 is decreased in the variable value of appr for every 1 value in loanprc.

c) atotinc and atotinc signs will be positive on an over all lever, as if they are larger then the chances of loan approval are larger as well.

Please upvote if this helps.