Chapter 8, Problem 2DAP

To determine

Introduction:

Lending standards will differ from place to place, country to country and will also vary from one financial institution to another. Lending standards are designed by the financial institutions and the guidelines are universal for all branches of that financial institution.

(a)To Find: The average values of the four recent quarters and next 4 quarters prior to it and note down the change in percentage.

EXPLANATION:

The data given here is related to the change in percentage in the net worth indicator and bank standards indicator. The average calculated for the present four quarters is 9.14% & -7.9% and prior next quarters is 11.84 % & -7.9 % which are in accordance with the expected values.

Quarters	TNWBSHNO	DRTSPM
01-10-2014	5.10	-11.1
01-7-2014	6.58	-18.3
01-4-2014	10.15	1.4
01-1-2014	10.69	1.4
Average	$\frac{5.10+6.58+10.15+10.69}{4}$ = 8.13	$\frac{-11.1-18.3+1.4+1.4}{4}$ = 6.65
01-10-2013	13.51	-8.7
01-7-2013	11.95	-7.5
01-4-2013	11.99	-7.8
01-1-2013	9.93	-7.6
Average	$\frac{13.51+11.95+11.99+9.93}{4}$ =11.84	$\frac{-8.7-7.5-7.8-7.6}{4}$ = -7.9

Net worth indicators tell us about the value of the households and NGOs. The values of the indicators are changed to reflect the worth from the previous year.

The fall in the value of the net worth indicator reflects that there is a reduction of the net worth of household and NGOs. At these situations, the banks become reluctant to issue the loans further as they are less worthy. Due to this, there is a strictness in the bank standards and are risen to issue to loans.

(b) To Find:

From the US Stock Indices-monthly of DJIA, the S&P 500, and NASDAQ Compositeusing the analysis tool indicator to calculate the correlation coefficient for the two series from the year 2007 and to conclude from it regarding the net worth of households and bank mortgage lendingstandards and to find if the results reduce asymmetric information.

EXPLANATION: The standard value for the bank standards and net worth indicator is -0.89 which means that there is a negative relation between the two, which is to reduce asymmetric information.

Whenever there is a fall in the value of the Net Worth indicator, there is a rise in the Bank Standard indicators and vice versa.