For the EBCT Model 2 on Page 31 the formula given is s2(0) = Pj var (Xj | 0 ). I dont understand why the Pj is included in the definition of s2(0)? Since we are removing the effect the volume of business Pj from Yj to get Xj, and Xj depends on 0, then I would have thought that s2(0) = var (Xj|0) 0 is used for theta Thanks
I have put an explanation of the logic behind this in the attachment so that you can see the formulae better. I hope this helps, Coralie
