Flow of funds modeling for localized financial markets: an application of spatial price and allocation activity analysis models

A comprehensive examination of recent and proposed institutional and regulatory changes impacting local financial markets and a summary of the most important applications of mathematical programming to individual financial intermediaries and financial markets are presented. While U.S. financial markets face myriad regulatory and structural changes, there has been no systematic examination of the effects of these changes on local financial markets. Mathematical programming models have been widely used to reflect the operational activity of individual financial intermediaries. However, a methodological and applications void exists in modeling local financial markets;Building on the concepts of self-dual quadratic programming models and mathematical models of individual intermediaries, a generalized perfect competition spatial price and allocation activity analysis model for localized financial markets is developed. The model provides an improved capability to reflect the topology of localized financial markets. There are two key structural aspects of the model: (1) activity analysis formulation of individual intermediary operations, and (2) simultaneous endogenous determination of pricing and flow of funds patterns in spatially separate source and use of funds markets. These aspects allow significant detail in modeling the financial intermediation process and considerable flexibility for policy analyses;The perfect competition model is modified to account for the unique competitive characteristics of financial markets. The modifications allow alternatives to perfect competition in both asset and liability markets. The structure accommodates modeling perfect competition in some asset and liability markets and collusion in others. Parameterization of model coefficients can be used to "imitate" other conditions of imperfect competition;A series of prototypes for commercial banking markets is used to extend the competitive concepts to include differentiated products; advertising; and modeling specific noncompetitive environments--monopolistic competition and the collusion, leading firm and market-share solution to the oligopoly problem;Since response functions for the supply of deposits and demand for credit at intermediaries represent the most important data input to the models, an econometric analysis of the demand for credit and deposit supply at commercial banks in Iowa is completed. The focus is on estimating the demand and supply of nonreal estate agricultural loans. Two stage least squares is used to estimate the structural equations. An hypothesis of markets in disequilibrium is tested. Finally, the structural equations are reestimated after correcting for heteroskedasticity.