INTEROFFICE ME MORANDU M

TO: JOHN MCCLINTOCK

FROM: ALEC VEDDER

SUBJECT: REGRESSION MODELS WITH DUMMY VARIABLES

DATE: NOVEMBER 15TH, 2018

Introduction
This memorandum is being written in order for an individual to be able to predict both
credit card limit and the likelihood of someone defaulting on a loan. Using a series of
dummy regressions one can determine the best variables to use and the equation to best
predict one’s credit card limit and the likelihood of someone defaulting on a loan using
the variables provided. After running these regression tests one can check the value on
the table to determine whether or not certain variables are significant and fit into the best
equation.

Data Analysis
Credit Card Limit:
Variables: All of the variables above should be included in the best model as the every
one of the variables have a low p-value and are significant in this equation, however, the
equation seems to be missing variables as its R2 value is low.

Equation: Credit ̂
Card Limit = 6256.32 − 302.61(Male) − 3237.61(HS) −
2316.18(University) − 2739.03(Single) + 57.14(Single ∗ Age) + 44.36(Age)

R2: This model is 10.91% of the way to accurately predicting the credit card limit of an
individual based upon age, education, marital status, agender, and age*marriage
interaction variable.

Coefficients:
Age: For a single person as age increases by 1-year credit limit increases by
101.50 on average all remain else remains constant.

Education: For a person who went graduated high school credit card limit
decreases by $3237.61 on average if all else remains constant. For a person who
graduated university credit card limit decreases by 2316.18 on average if all else
remains constant.

Marital Status: For a person who is single credit card limit decreases by 2739.04
on average if all else remains constant.

Gender: For a male credit card limit decreases by 302.61 on average if all else
remains constant.

Age*Marriage Interaction Variable: For a married person as age increases by one-

year credit limit increases by 44.36 on average all if else remain constant.

Prediction: $6256.32 is this person’s credit card limit

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Likelihood of Defaulting on Next Month’s Payment:

Variables: All of the models used in this equation should be used in the best model as
they all have low p-values in this regression, so they are significant, so it would make
sense that they would be in the best model.

̂ on Next Payment = .21 + 4.479E −

Equation: Likelihood of Defauting
06(Avg Bill Pay Amount) − .00001(Avg Payment) + .0008(Age)

R2: This model is 1.13% of the way to accurately predicting the likelihood of an
individual defaulting on next month’s payment based upon age, average bill amount, and
average previous payment amount.

Coefficients:
Average Bill Amount: As average bill amount increases by $1 the chance of
defaulting increases by .000448 percentage points, on average if all others remain
constant

Average Previous Payment Amount: As average previous payment amount

increases by $1 the chance of defaulting decreases by .01 percentage points, on
average if all others remain constant.

Age: As a person’s age increases by 1 the chance of defaulting increases by .08

percentage points, on average if all others remains constant.

Prediction: 23.81% chance of them defaulting on their next month’s payment

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Conclusion
After running two different dummy regressions one would suggest that either model
would be useful to determine significant variables based upon the p values of the
variables. However, the R2 values of both are low meaning they are not very close to
accurately predicting the y value of each equation every time, making them not are useful
to actually predict the y value. If one needed to suggest the model predicting credit card
limit would be the better model to suggest. If you have any questions about the
conclusions reached, contact me at alecvedder@email.arizona.edu.