QUANTITATIVE TOOLS IN

FINANCE
Group Assignment

Submitted by:

Team 9
Saurav Mandal
Vandit Sharma
Gagandeep Kaur

NOVEMBER 2, 2019
ALBA GRADUATE BUSINESS SCHOOL
Introduction: As a part of the group assignment of Quantitative Tools in Finance, we have
used real life HR data from Cisco Systems Inc., India where one of us has interned.

Independent Variables:

 Grade
It depicts the grade or level of the job opening in the hierarchy. The grades identifies the
position that generally relies on the experience or quality of the background. We will
determine how much days are taken to fill the job role of a particular grade, whether it takes
longer for a higher grade job or a lower job. This is an ordinal variable.

 Approval Time
This refers to the obligatory time required to get approval from the management. Say, if a
job role of a senior manager is open, HR is expected to take authorisation from senior
management about the position that whether to hire or not and how to go about the filling
or hiring and final packages details, etc. This is a continuous variable and measured in days.

 Manager
This is just a simple yes/no entry giving the information that if the job role is a managerial
position or not. It is a crucial factor to determine because any managerial position requires
much decision-making and hence, the decision of choosing an appropriate candidate for the
role. HR or senior management pits a lot of effort and time to search for a fit employee who
can lead the team to achieve the desired goals for the company. This is a dichotomous
variable.

 Replacement
This aspect of the data tells whether the opening is a replacement of an employee if
someone has left the job, and we are required to fill in the vacant position or it is a new
position. This is quite common in the organization when someone leaves the job, and the
management has to fill the place carefully, as the new hire would be responsible for taking
forward from where the previous employee left, and the role has to be filled for specific
required competencies. Other situation could be when an organisation requires more
workforce and hence opens new job roles. This is also a dichotomous variable.

 Competency Level
This data tells us about the competency levels of HR managers responsible for the hiring.
HR professionals need business acumen, HR expertise, leadership qualities and the ability
to establish HR as an advocate. Based on four primary competencies - communication,
analysis capabilities, relationship-building skills and leadership qualities, HR managers are
rated from 1 to 5. This is an ordinal variable.
Dependent Variable:

 Days to fill a job opening

This is our dependent variable where we are finally observing the total days consumed by
the HR to fill a job opening, which is dependent on the factors stated above. The dependent
variable is essential in HR Recruitment to observe the performance and trend of the market.
Sometimes, organisations review their functions by following the days taken to perform
this activity and then by implementing new policies and software to make the process
effective and efficient. The days required differ from job to job, the role of the job, approval
time and hence the dependent variable. This is a continuous variable and measured in days.
Methodology: We have performed descriptive statistics of variables using excel and
inferential statistics using STATA. The data has six variables, where Days to fill a Job
Opening is the dependent variable and others are independent variables.

Descriptive Statistics of all variables:

Grade

Mean 3.295454545
Standard Error 0.118172254
Median 3
Mode 4
Standard
Deviation 1.357695827
Sample Variance 1.84333796
-
Kurtosis 0.608526691
Skewness 0.22781744
Range 6
Minimum 1
Maximum 7
Sum 435
Count 132

Approval Time

Mean 27.78787879
Standard Error 2.823332085
Median 16
Mode 13
Standard Deviation 32.43761606
Sample Variance 1052.198936
Kurtosis 8.916696135
Skewness 2.740589545
Range 189
Minimum 0
Maximum 189
Sum 3668
Count 132
Confidence
Level(95.0%) 5.585224339

Manager

Mean 0.257575758
Standard Error 0.038206998
Median 0
Mode 0
Standard
Deviation 0.438964989
Sample Variance 0.192690261
Kurtosis -0.75384916
Skewness 1.121519267
Range 1
Minimum 0
Maximum 1
Sum 34
Count 132

Replacement

Mean 0.575757576
Standard Error 0.043180854
Median 1
Mode 1
Standard
Deviation 0.496110246
Sample Variance 0.246125376
-
Kurtosis 1.933363148
Skewness -0.31010477
Range 1
Minimum 0
Maximum 1
Sum 76
Count 132

Days to Fill Job Opening

Mean 55.04545455
Standard Error 4.366757476
Median 41.5
 Mode 45
Standard Deviation 50.17022377
Sample Variance 2517.051353
Kurtosis 3.947705532
Skewness 1.834544651
Range 269
Minimum 0
Maximum 269
Sum 7266
Count 132
Confidence
Level(95.0%) 8.638487931

Competency level

Mean 3.28030303
Standard Error 0.112442647
Median 3
Mode 3
Standard
Deviation 1.291867658
Sample Variance 1.668922045
Kurtosis -0.98454282
-
Skewness 0.236389128
Range 4
Minimum 1
Maximum 5
Sum 433
Count 132

Hypothesis tests for One Sample t-test:

 Two tailed test
H0 : Days to Fill Job Opening = 65

H1 : Days to Fill Job Opening ≠ 65

 One tailed test 1
H0 : Days to Fill Job Opening ≥ 65

H1 : Days to Fill Job Opening < 65

 One tailed test 2
H0 : Days to Fill Job Opening ≤ 65

H1 : Days to Fill Job Opening > 65

Results:
 For two tailed test, we reject the null hypothesis as P<0.05 and thus at 95% confidence level, days to
fill job is not equal to 65 days.
 Similarly, for One tailed test 1, we reject null hypothesis and thus at 95% confidence level, days to fill
job is less than 65 days.
 For One tailed test 2, we accept the null hypothesis that mean is equal to 65 at 95% confidence level.

Hypothesis tests for Approval time:

 Two tailed test
H0 : Approval time = 33

H1 : Approval time ≠ 33
 One tailed test 1
H0 : Approval time ≥ 33

H1 : Approval time < 33

 One tailed test 2
H0 : Approval time ≤ 33

H1 : Approval time > 33

Results:
 For two tailed test, we accept the null hypothesis as P>0.05 and thus at 95% confidence level, Approval
time is equal to 33 days.
 Similarly, for One tailed test 1, we reject null hypothesis and thus at 95% confidence level, days to fill
job is less than 33 days.
 For One tailed test 2, we accept the null hypothesis that Approval time is equal to 33 days at 95%
confidence level.

Hypothesis tests for Two Sample t-test:

Let there be two groups, one with non-managerial position (0) and the other with the managerial position (1)

 Two tailed test

H0 : Mean(0) = Mean(1)

H1 : Mean(0) ≠ Mean(1)
 One tailed test 1
H0 : Mean(0) ≥ Mean(1)

H1 : Mean(0) < Mean(1)

 One tailed test 2
H0 : Mean(0) ≤ Mean(1)

H1 : Mean(0) > Mean(1)

Results:
 For two tailed test, we reject the null hypothesis that means of two groups are equal as P<0.05 and
thus at 95% confidence level, we conclude means of two groups are different.
 Similarly, for One tailed test 1, we reject null hypothesis and thus at 95% confidence level, means of
Days to fill job opening are lesser for non-managerial roles compared to managerial roles.
 For One tailed test 2, we accept the null hypothesis that Days to fill job openings for non-managerial
roles are less than equal to days required for managerial roles at 95% confidence interval.
Linear Regression:
For linear regression, we took Days to fill job opening as Dependent Variable and Approval time as independent variable.
Both are continuous variables.

Scatter Plot
300

250
Days to Fill Job Opening

200

150
y = 0.4774x + 41.778
100

50

0
0 50 100 150 200
Approval Time

Approval Days to Fill Job

Correlation Time Opening
Approval Time 1
Days to Fill Job
Opening 0.308688769 1

Results:
 The P value of F test is < 0.05, which means at 95% confidence interval our model is statistically
significant and we reject null hypothesis and accept alternative hypothesis that R-squared is not equal
to 0, i.e. our model has some explanatory power.
 R-squared value 0.0953 means our independent variable Approval time is able to explain only 9.53% of
the variations in Days to fill job openings. Certainly, we need to improve our model.
 From t-test, as P-values<0.05, we can conclude the coefficient of variable Approval time and constant
term are not equal to 0 and have significant effect on Days to fill job opening.
  Coefficient of Approval time is 0.478 means, for 1-day increase in approval time, the days to fill job
opening will increase by 0.478 days.
 Regression equation: Days to Fill Job Opening = 41.78 + 0.48 (Approval Time)
 Correlation coefficient of the two variables is 0.308, showing positive correlation.

Multiple Linear Regression:

Step 1:

Methodology: We have deployed General to Specific Approach in our linear regression model. We included all the
independent variables in the multiple regression model and thereby eliminated non-significant variables to refine the model.

Results: Not all coefficients are significant. Approval Time and Replacement has P-value> 0.05, and hence we would discard
them in new model. The model is able to explain 43.06% variation of the dependent variable (from R –squared value)
Regression equation of this model:

Days to fill job opening = 109.65 + 0.22 (Approval Time) + 40.74 (Manager) – 6.58 (Grade) + 9.44 (Replacement) – 16.72
(Competency Level)

Step 2:

Results: After removing the non-significant variables, the new model has the variables Manager, Grade and Competency
level. All of them are significant from the P-value. The model is able to explain 40.5% variation of the dependent variable.
The P value of F test is < 0.05, which means at 95% confidence interval our model is statistically significant and we reject null
hypothesis and accept alternative hypothesis that R-squared is not equal to 0, i.e. our model has some explanatory power.
The regression equation of this model:

Days to fill job opening = 128.29 + 41.09 (Manager) – 6.86 (Grade) – 18.66 (Competency Level)

We further try to increase the R-square value of the model by including squares of eligible independent variables.

Step 3:

Results: By including squares of Competency level and Grade, R-value of the model increases, but Grade becomes
insignificant. So we try adding squares of the eligible variables individually.

Step 4:

Results: By adding square of Grade only, R-value remains almost equal and Grade becomes statistically insignificant.
Step 5:

Results: By adding square of Competency Level, the R-value increases to 44.26% and all the variables remain statistically
significant. So, we consider this as the final model. In addition, we further apply Regression diagnostics to check for our
assumptions of CLRM: Heteroscedasticity, Ramsey’s RESET Test, Multicollinearity, and Normality. We do not conduct
Autocorrelation, as we do not have time series data.

Predicting Dependent Variable: We try to predict dependent variable – Days to fill job opening using a set of independent
variables – Grade, Manager, and Competency Level with our model.

Input Data: Grade = 2, Manager = 0, Competency Level = 4, Sq_Competency Level = 16

Output: Days to fill job opening = 29.01. It means for a low grade non-managerial position and high competency level of
responsible HR manager, it would take 29 days approximately to fill this position.

Input Data: Grade = 4, Manager = 1, Competency Level = 2, Sq_Competency Level = 4

Output: Days to fill job opening = 99.41. It means, for a combination of higher-grade managerial position and a low
competency level of the responsible HR manager, it would take 100 days.
Heteroscedasticity:
1. Residual plot: Residual vs predicted value plot (Yhat) using rvfplot:

Results: The plot does not look random, and It diverges after a certain point. So the variance of the residuals might not be
homoscedastic of constant.

2. Breusch-Pagan test for heteroscedasticity

Results: The White’s general test confirms our suspicion that the variance of the residuals are not constant. We reject the
null hypothesis of constant variance as P-value < 0.05.

3. White’s Test:
Results: The White’s test also suggest that the model is not homoscedastic, as P-value <0.05 and we reject null hypothesis
of homoscedasticity.

Ramsey’s RESET Test:

Results: The results suggest that our model might have some omitted variables as P-value < 0.05, and we have to reject the
null hypothesis.

Multicollinearity:
Note: We ran multicollinearity test with the model containing all the initial independent variables and the model containing
only the significant independent variables respectively below.

Results: The VIF measures of the first model looks fine as VIF<10. But the model which we have considered final contains VIF
measures>10 seems troublesome. Although after removing insignificant variables, ideally this should not have happened.
Normality test:

Results: The null hypothesis is that distribution of residual is normal, here the P-value is < 0.05, we reject the null (at 95%).
We conclude that the residuals are not normally distributed.