A Test of Portfolio Crowding-Out and Related Issues in Finance
AbstractThis paper tests hypotheses regarding the parameters in investors'asset demand functions. Most important is the hypothesis that federal bonds are closer substitutes for equity than for money; it is associated with the hypothesis of "portfolio crowding out" by federal borrowing. Previous regression studies of asset demand functions have not been able to obtain precise and plausible estimates for the parameters, without the imposition of prior beliefs. The present paper uses a MLE technique that dominates regression in that it makes full use of the constraint that the parameters are not determined arbitrarily, but rather are determined by mean-variance optimization on the part of the investor. The technique also dominates, on the other hand, previous estimates of the optimal portfolio from ex post return data, in that expected returns are not assumed to be constant over time, or to change slowly, but rather are allowed to fluctuate freely. Thus the framework is consistent with questions such as the effects of a sudden increase in federal debt on the expected returns of the various assets.Some hypotheses are tested where the answer seems clear in advance, such as a negative effect of the supply of money on the expected rate of return on equities. There the results of the MLE technique are much more plausible than the regression results. In the case of greatest controversy, a point estimate shows portfolio crowding in, not portfolio crowding out.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1205.
Date of creation: Mar 1986
Date of revision:
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Friedman, Benjamin Morton, 1977. "Financial Flow Variables and the Short-Run Determination of Long-Term Interest Rates," Scholarly Articles 4554309, Harvard University Department of Economics.
- E.K. Berndt & B.H. Hall & R.E. Hall, 1974. "Estimation and Inference in Nonlinear Structural Models," NBER Chapters, in: Annals of Economic and Social Measurement, Volume 3, number 4, pages 103-116 National Bureau of Economic Research, Inc.
- Smith, Gary N & Brainard, William C, 1976. "The Value of A Priori Information in Estimating a Financial Model," Journal of Finance, American Finance Association, vol. 31(5), pages 1299-1322, December.
- Roley, V Vance, 1979. "A Theory of Federal Debt Management," American Economic Review, American Economic Association, vol. 69(5), pages 915-26, December.
- Fair, Ray C & Malkiel, Burton G, 1971. "The Determination of Yield Differentials between Debt Instruments of the Same Maturity," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 3(4), pages 733-49, November.
- Masson, Paul R, 1978. "Structural Models of the Demand for Bonds and the Term Structure of Interest Rates," Economica, London School of Economics and Political Science, vol. 45(180), pages 363-77, November.
- Zvi Bodie & Alex Kane & Robert L. McDonald, 1984. "Why Are Real Interest Rates So High?," NBER Working Papers 1141, National Bureau of Economic Research, Inc.
- Backus, David, et al, 1980.
"A Model of U.S. Financial and Nonfinancial Economic Behavior,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 12(2), pages 259-93, Special I.
- David Backus & William C. Brainard & Gary Smith & James Tobin, 1980. "A Model of U.S. Financial and Nonfinancial Economic Behavior," Cowles Foundation Discussion Papers 548, Cowles Foundation for Research in Economics, Yale University.
- Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-87, September.
- Barro, Robert J, 1974.
"Are Government Bonds Net Wealth?,"
Journal of Political Economy,
University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
- Blinder, Alan S. & Solow, Robert M., 1973. "Does fiscal policy matter?," Journal of Public Economics, Elsevier, vol. 2(4), pages 319-337.
- Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, vol. 65(5), pages 900-922, December.
- William C. Brainard & James Tobin, 1968. "Pitfalls in Financial Model-Building," Cowles Foundation Discussion Papers 244, Cowles Foundation for Research in Economics, Yale University.
- William D. Nordhaus & Steven N. Durlauf, 1982. "The Structure of Social Risk," Cowles Foundation Discussion Papers 648, Cowles Foundation for Research in Economics, Yale University.
- Blanchard, Olivier J & Plantes, Mary Kay, 1977. "A Note on Gross Substitutability of Financial Assets," Econometrica, Econometric Society, vol. 45(3), pages 769-71, April.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.