The relationship between country credit ratings and the volatility of the countries' stock markets was examined in a study in the Journal of Portfolio Management (Spring 1996). The researchers point out that this volatility can be explained by two factors: the countries' credit ratings and whether the countries in question have developed or emerging markets. Data on the volatility (measured as the standard deviation of stock returns), the credit rating (measured as a percentage), and market type (developed or emerging) for a sample of 30 countries are in the attached data file.

1.Need to write a model that describes the relationship between volatility (y) and credit rating (x1) as two nonparallel lines, one for each type of market. Specify the dummy variable coding scheme that you use.

2.Plot volatility (y) against credit rating (x1) for all the developed markets in the sample. On the same graph, plot y against x1 for all emerging markets in the sample. Does it appear that the model specified in part a is appropriate? Explain.

3.Fit the model from part a to the data. Report the least-squares prediction equation for each of the two types of markets.

4.Plot the two prediction equations of part c on a scatterplot of the data.

5.Is there evidence to conclude that the slope of the linear relationship between volatility y and credit rating x1 depends on market type? Test using alpha= 0.01.

6.Conduct a residual analysis for the model to check the assumptions on the error term.

Data:

Country:

Afghanistan

Australia

China

Cuba

Germany

France

India

Belgium

Canada

Ethiopia

Haiti

Japan

Libya

Malaysia

Mexico

NewZealand

Nigeria

Oman

Panama

Spain

Sudan

Taiwan

Norway

Sweden

Togo

Ukraine

UnitedKingdom

UnitedStates

Vietnam

Zimbabwe

Volatility:

55.7

23.9

27.2

55

20.3

20.6

30.3

22.3

22.1

47.9

54.9

20.2

36.7

24.3

31.8

24.3

46.2

28.6

38.6

23.4

60.5

22.2

21.4

23.3

45.1

46.3

20.8

20.3

36.9

36.2

Crating:

8.3

71.2

57

8.7

90.9

89.1

46.1

79.2

80.3

14.1

8.8

91.6

30

69.1

41.8

69.4

15.8

51.8

26.4

73.7

6

79.9

84.6

74.1

17

15.7

87.8

90.7

29.5

31

Market:

E

D

E

E

D

D

E

D

D

E

E

D

E

E

E

D

E

D

E

D

E

D

D

D

E

E

D

D

E

E