An insurance company forecasts the dollars of coverage
an individual purchases using the followingspecification:
Coveredamountt = γ0 + γ1Aget + γ2Incomet + ΓiΩi,t (1)
where Ωi,t represents a matrix of dummy variables for the
occupation industry of the insured individual.
(a) Explain the statistical problem or problems likely to exist
with the specification inequation 1.
(b) Explain how the statistical problems likely make this a poor
forecasting model.
(c) Rewrite the equation in such a way that may make it a more
feasible model. This caninclude the addition of new variables.
The COVID-19 crisis is creating enormous problems for the economy
and therefore forecasts about theeconomy.
(a) How would you attempt to incorporate this into your forecast
model and your forecastresults? Note: I am not asking you to
actually do this, rather explain in words how you would approach
this.
(b) How would you incorporate a $2 trillion rescue package into
your forecast? Pay attentionto explaining issues such as timing of
relief, sectoral differences and distinctions, and any other issues
you want to incorporate.
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