Memo Outline Lab-4-3 - Regression Models with Dummy Variables Lab PDF

Preview

Summary

Regression Models with Dummy Variables Lab...

Description

INTERO FFICE MEMORAN DUM

TO:

GRAY HUNTER

FROM:

MEGAN LEE

SUBJECT: CHAPTER 17 LAB DATE:

NOVEMBER 14 2018

Introduction In this document, models were ran to predict both credit card limit and the likelihood of someone defaulting on a loan. Specifically, we ran two regression models with dummy variables for predicting limit as well as likelihood of someone defaulting on a loan based on various variables. Data Analysis

Regression equation: ^ Credit Limit=−22.94 +302.61 ( female ) +921.43 ( university )+3237.61 ( grad school ) +2930.03 ( married )−5 Interpretation of R-squared: We are 10.91% of the way to perfectly predicting credit limit using the variables in the model. Interpretation of coefficients: Since all of the variables have low p-values, we can conclude that all explanatory variables can be used. Females will have a $302 higher credit limit than men, on average all else constant. As age increases by 1 for single people, credit limit increases by $101.50, on average all else constant. As age increases by 1 for married people, credit limit increases by $44.36, on average all else constant. As age increase by 1 for single people, credit limit increases $57.14 more than for a married person. Predict limit of a 35-year-old, married, female with a university degree: -22.94 + 302.61(1) + 921.43(1) + 3237.61(0) + 2930.03(1) – 57.14(35*1) +101.50(35) = $5683.73

^ likelihood of defaulting = .208+0.00000448(Average bill amount) – 0.00014(average previous payment amount + 0.000831(age) Interpretation of R-squared:

2

We are 11.25% of the way to perfectly predicting someone’s probability of defaulting on a payment using the variables in the model. Interpretations of coefficients: As average bill amount increases by $100, the chance of defaulting increase by .0448 percentage points, on average all else constant. As age increases by 1, likelihood of defaulting increases by .0831 percentage points, on average all else constant. Predict the chance of someone defaulting who is 40 years old, has an average bill amount of $1500, and average payments of $700: .208 + 0.00000448(1500) – 0.00014(700) +0.000831(40) = 0.14996 There is a 15% chance that someone who is 40 years old with an average bill amount of $1500 and average previous payments of $700 will default on their payment. Conclusion Two regression models were ran two with dummy variables for predicting limit as well as likelihood of someone defaulting on a loan based on various variables. Because of both of their low R-square, I would not suggest using either of these models.

3...