Independence, homoskedasticity and existence in random utility models

Introduction Random utility models are often characterised by descriptions such as ‘homoskedastic’ or ‘independent’ in the utilities of the alternatives. However these descriptions do not have meaning in any absolute sense and must therefore be used with care. It is the main aim of this paper to demonstrate this point and discuss the issues it raises. In particular, the discussion leads into a consideration of the circumstances under which the models can be said to exist. The paper gives a definition of random utility models and goes on the define a large sub-class of those models, the additive stimulus models, on which the main discussion of the paper is focussed. The area of discussion is further specified by relating the probability statement, which is the main form in which the model is estimated and used, to the utility and utility difference distributions. New concepts are introduced of indistinguishability and almost-indistinguishability, which can be used in assessing discrete choice models. The paper then shows how a reasonable notion of model structure can be interpreted in terms of utility difference distributions for a class of indistinguishable models. The discussion of the independence of the utility distributions of the alternatives is based on the concepts introduced in the early parts of the paper. This discussion shows that many indistinguishable models exist for which the correlation of the utility functions is radically different. A following discussion goes on to show that the notion of heteroskedasticity is similarly incapable of clear definition, even within classes of indistinguishable models. The final main section discusses the issue of existence, finding that it is quite difficult to ensure that models actually represent a ‘real’ situation, although it is seen as important that the models actually ‘exist’ in some sense.. An error components approach, whether using purely probit models or substituting a logit kernel appears a useful approach to maintaining the ‘reality’ of the model

Is relationship lending special? : Evidence from credit-file data in Germany

The German financial market is often characterized as a bank-based system with strong bank-customer relationships. The corresponding notion of a housebank is closely related to the theoretical idea of relationship lending. It is the objective of this paper to provide a direct comparison between housebanks and "normal" banks as to their credit policy. Therefore, we analyze a new data set, representing a random sample of borrowers drawn from the credit portfolios of five leading German banks over a period of five years. We use credit-file data rather than industry survey data and, thus, focus the analysis on information that is directly related to actual credit decisions. In particular, we use bank-internal borrower rating data to evaluate borrower quality, and the bank's own assessment of its housebank status to control for information-intensive relationships

Steps Towards a Method for the Formal Modeling of Dynamic Objects

Fragments of a method to formally specify object-oriented models of a universe of discourse are presented. The task of finding such models is divided into three subtasks, object classification, event specification, and the specification of the life cycle of an object. Each of these subtasks is further subdivided, and for each of the subtasks heuristics are given that can aid the analyst in deciding how to represent a particular aspect of the real world. The main sources of inspiration are Jackson System Development, algebraic specification of data- and object types, and algebraic specification of processes

Correlation, price discovery and co-movement of ABS and equity

Asset-backed securitization (ABS) has become a viable and increasingly attractive risk management and refinancing method either as a standalone form of structured finance or as securitized debt in Collateralized Debt Obligations (CDO). However, the absence of industry standardization has prevented rising investment demand from translating into market liquidity comparable to traditional fixed income instruments, in all but a few selected market segments. Particularly low financial transparency and complex security designs inhibits profound analysis of secondary market pricing and how it relates to established forms of external finance. This paper represents the first attempt to measure the intertemporal, bivariate causal relationship between matched price series of equity and ABS issued by the same entity. In a two-dimensional linear system of simultaneous equations we investigate the short-term dynamics and long-term consistency of daily secondary market data from the U.K. Sterling ABS/MBS market and exchange traded shares between 1998 and 2004 with and without the presence of cointegration. Our causality framework delivers compelling empirical support for a strong co-movement between matched price series of ABS-equity pairs, where ABS markets seem to contribute more to price discovery over the long run. Controlling for cointegration, risk-free interest and average market risk of corporate debt hardly alters our results. However, once we qualify the magnitude and direction of price discovery on various security characteristics, such as the ABS asset class, we find that ABS-equity pairs with large-scale CMBS/RMBS and credit card/student loan ABS reveal stronger lead-lag relationships and joint price dynamics than whole business ABS. JEL Classifications: G10, G12, G2

Completeness, robustness, and safety in real-time software requirements specification

This paper presents an approach to providing a rigorous basis for ascertaining whether or not a given set of software requirements is internally complete, i.e., closed with respect to questions and inferences that can be made on the basis of information included in the specification. Emphasis is placed on aspects of software requirements specifications that previously have not been adequately handled, including timing abstractions, safety, and robustness

Automobile demand, model cycle and price effects

The purpose of this paper is to explore the models’ life cycle in automobile demand, exploiting a newly-constructed data set. In particular, we analyze the characteristics of the cycle of models by means of non-parametric regressions of model shares on model ages (or time of permanence in the market). Then we test for the presence of price effects of the cycle, using techniques of the discrete-choice approach to demand estimation in differentiated product markets. Results show that own-price elasticities vary with age. Elasticities decrease after the introduction of the model and begin to increase when it has been marketed for three years