Question

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.

Answer 1

Solution: