Finance: A Characteristics Approach

Finance: A Characteristics Approach

Finance: A Characteristics Approach

Finance: A Characteristics Approach

Synopsis

This text brings together some of the research by leading exponents of the characteristics model and its application to finance.

Excerpt

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The origins of the characteristics model in economics date back to the mid-1950s. The earliest applications analysed the demand for related goods (such as various types of food) in terms of the common set of characteristics or attributes embodied in them (such as taste, nutritiousness, hunger relief, preparation time, etc.), rather than in terms of the specific items of food that individuals consumed (such as bread, haddock, eggs, beef and so on) (see especially Gorman, 1959, 1980; also Stone, 1956). Productive activity, in particular the relationship between a firm’s outputs and its factors of production (such as labour, capital and land), was also analysed in terms of characteristics (see Makower, 1957). The principal objective of the characteristics framework is to simplify the analysis of complex relationships by modelling the behaviour of a large group of variables in terms of a much smaller set of measurable characteristics that are common to the larger group. For example, the preferences of consumers over a vast range of different food items can be given an equivalent but simplified representation in terms of a much smaller number of common characteristics, on the grounds that consumers are in reality interested in ‘consuming’ these characteristics rather than the particular items of food that deliver the characteristics.

The characteristics model was popularised in the 1960s and early 1970s by Lancaster (1966, 1971). The 1970s and early 1980s saw the publication of a series of empirical applications of the model, ranging from an analysis of the UK National Food Survey which covers more than 150 different foods purchased for consumption in the home (see Boyle et al., 1977; Pudney, 1980, 1981a, b), through studies of quality measurement (see Lucas, 1975; Triplett, 1976; Klevmarken, 1977) and consumer durables (see Cragg and Uhler,

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