The trend analysis above indicates that the delinquency rate is rapidly becoming
ID: 3179178 • Letter: T
Question
The trend analysis above indicates that the delinquency rate is rapidly becoming a serious problem for this savings and loan. A management consultant suggests that analysis may be overstating the upward trend because it fails to account for the fact that the months of December and January are consistently much worse months than the rest. The consultant suggests estimating the following model: DR_1 = a + bt+ cD where D is equal to one for the months of December and January, and zero otherwise. The estimation results are: d Does the new model indicate a significant upward trend in the delinquency rate? Perform the appropriate t-test. e. Perform a t-test to determine whether December and January are significantly worse months for mortgage payments. f Predict the delinquency rates for January 2014 and March 2014. DR_Jan 2014 = percent DR_Mar 2014 = percent Show your work here g Compare your forecasts in parts c and f Explain why they differ.Explanation / Answer
d. Null Hypothesis : Ho : There is no trend with variation with t ; b = 0
Alternative Hypothesis : H1 : There is a significant trend; b 0
T -ratio = estimate / standerd error = 0.018/0.004 = 4.5
T - ratio for b is 4.50 and p value is equal to 0.0001 which is equal to significance level 0.0001. So, it can be said that there is significant upward trend in deliquency rate and we reject the null hypothesis that trend is zero.
e. We performed a similar t- test to determine effect of categorical variable D where D is equal to1 for December and january and 0, otherwise. Here T - ratio 3.86 and p- value is equal to 0.004 which is outside the 0.0001 significance level that means there is no stastically significant result caused by December and January month. So, Janaury and December have put any worse impact on mortagage payments.
f. DR Jan 2014 = a + bt + cD
= 2.200 + 0.018 * 1 + 0.810 * 1 = 3.028
DRmarch 2014 = a + bt + cD
= 2.200 + 0.018 * 3 + 0 = 2.254
g. there is no part c in this question.
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