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Sudarshan Kumar

Let payments=X and Claims =Y

The regression equation

= X i + ,

(1)

Likelihood function of Y

(,

2)

=

=1

2 2

( )2

22

( )2

2)

2)

(, = ln(2 +

2

2 2

(2)

(3)

=1

For maximization

R code:

( ) 2

=

=0

2 2

(4)

=1

# 2. Compute beta_hat

Y<-Payment

X<-Claims

beta_h<- (Y)%*%(X)/ ((X)%*%(X))

beta_h

## [1,] 5016.056

#estimate of Beta

=1

=1 2

(5)

From equation 5

=

=

=1

=1 2

=1 (X i + )

=1 2

(6)

=1

=1 2 =1

+

=

+

=1 2

=1 2

=1 2

We can see it clearly =1 = 0 , (it is nothing but

representation of equation 4

=

2

= =

(=1 )2

(8)

2

=1 2

( =1( )2 + =1 =1( )( ))

(7)

(9)

2

=1 2

=1 2

=1 2

(10)

=1 2

Using equation 3 :

(,

2)

( )2

= ln(2 2 ) +

2 2

2

=1

( )2

=0

2 2 2

2 4

=1

(11)

(12)

1

1

=> = ( )2 = 2

=1

=1

(Estimating by replacing )

2

=1

=1

1

1

2

2 = = 2 2 + 2 2

=1

=1

=1

(14)

1

= ( 2 2 + 2 2 )

This yield

=1

(=1 )2

1

= ( 2 2

+

2 )

2 2

=1 2

=1 =1

=1

=1

2 =

1

(

=1 2

=1

2

=1

(17)

= X i +

(18)

= ()X i +

This implies

(19)

= ()X i + 2 ()Xi

=1

=1

=1

=1

(20)

=1

=1

=1

=1

2

= 2 + 2 2 ( ) X i

2

(15)

(16)

= X i +

(13)

(21)

=

=1

2

=1 2

=1

=1

+ 2

X i = 2 + 2 2 2

=1 2

2

(22)

=1

(23)

2 = ( 1) 2

=1

=1 2

1

This also answer the last part Q 1 c that MLE of sigma :-

(24)

2

=1

is biased

R code for b, c, d

Q1.b C and D standard error of regression and coefficient

e<- Y- beta_h * X

ESS<- t(e)%*%e #error sum of squares

ESS

##

[,1]

## [1,] 2.073899e+13

sigma2_hat<- ESS/(2182-1) #standard error of regression

sigma2_hat

##

[,1]

## [1,] 9508935471

SE_hat = sqrt(sigma2_hat)

# SD for beta hat

SD_beta_hat<- sqrt(sigma2_hat/(t(X)%*%(X)))

SD_beta_hat

##

[,1]

## [1,] 10.02538

MLEsigma2_hat=ESS/(2182)

MLEsigma2_hat

#MLE estimate of standard error of regression

##

[,1]

## [1,] 9504577572

= ,

(25)

=1

2

= (

)

=1 2

=1 2

Rcode

Q1.E 95 % confidence interval of Beta

LB=beta_h-1.96*SD_beta_hat

UB=beta_h+1.96*SD_beta_hat

LB

##

[,1]

## [1,] 4996.406

UB

##

[,1]

## [1,] 5035.705

Since,

=

=> =

Hence if we create a new variable distance *claim then its a normal linear regression model

R code for model formulation

(26)

newdata=Claims*Kilometres

X=newdata

reg=lm(Y~X+0)

summary(reg)

##

##

##

##

##

##

##

##

##

##

##

##

##

##

##

##

##

Call:

lm(formula = Y ~ X + 0)

Residuals:

Min

1Q

-4854422

-19780

Median

0

3Q

10879

Max

9436080

Coefficients:

Estimate Std. Error t value Pr(>|t|)

X 2109.22

20.55

102.6

<2e-16 ***

--Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1

Residual standard error: 434600 on 2181 degrees of freedom

Multiple R-squared: 0.8285, Adjusted R-squared: 0.8284

F-statistic: 1.053e+04 on 1 and 2181 DF, p-value: < 2.2e-16

a= confint(reg,"X",level=0.95)

Dist2interval = a*2

Dist2interval

##

2.5 %

97.5 %

## X 4137.835 4299.044

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