AQRM Exercise Lecture

Week 18

Rabeya Khatoon
Office: 1.04, 25-27 Belgrave Road
Office Hours: Mondays 10.30 to 11.30, 13.30 to 14.30
• Go to www.responseware.eu

• Enter session ID as AQRMEL4

Cantor and Packer (1996)
 1. What is the Interpretation of coefficient
of average ratings in model (1)?
A. One point increase in average
ratings will reduce the yield
spread by 22.1 percent
B. One percent increase in
average ratings will reduce the
yield spread by 22.1 points
C. One point increase in average
ratings will reduce the yield
spread by 0.221 points
Is the slope coefficient in model 1
statistically significant at 5% level?
A. No
B. Yes
C. Need more information
 What could be the difference in your
interpretation if the dependent variable was
yield spread instead of log yield spread?
A. No change
B. The slope coefficient would
represent a point to point
change in spread due to a
change in credit rating
C. The slope coefficient would
represent elasticity in spread
due to a change in credit rating
What is the interpretation of the
intercept coefficient in model 1?
A. Meaningless
B. The yield spread
C. The average log yield spread
2. Consider models (2) and (3) and the estimates of
the coefficient of Indicator for economic
development. Why do you think adding the variable
Average ratings changed the coefficient in model (3)?

Rank Responses
1 OMITTED VARI...
2 DON'T KNOW
3 OVB
4 -0.723
5 ADDING MORE ...
6 AVERAGE RATI...
Model (2) and (3) estimates for Indicator for
economic development coefficient suggests
that Average ratings incorporates economic
development indicators.
A. True
B. False
Compare the adjusted values of
 model (2) and (3). Which model is
better?
A. Model 2
B. Model 3
C. Both of them
Compare the adjusted values of model
 (1), (2) and (3). Which model is better?

A. Model 1
B. Model 2
C. Model 3
D. All of them