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Portfolio Theory, Transaction Costs, and the Demand for Time Deposits

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  • Hess, Alan C

Abstract

Households do not rebalance their deposit portfolios in response to 200-300 basis point changes in relative yields. Is it because the deposits are poor substitutes or because transaction costs make it nonoptimal to rebalance? This study uses efficient frontier techniques from portfolio theory and a transaction-cost model to address these questions. The major findings are that the transaction-cost model explains deposit shares but the portfolio model does not and the gains from rebalancing are minuscule because banks made large changes in relative yields on poor substitutes while maintaining fairly constant spreads on close substitutes. Copyright 1995 by Ohio State University Press.

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  • Hess, Alan C, 1995. "Portfolio Theory, Transaction Costs, and the Demand for Time Deposits," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1015-1032, November.
    • Handle: RePEc:mcb:jmoncb:v:27:y:1995:i:4:p:1015-32
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    Cited by:

    1. Enzo Dia & Massimo Giuliodori, 2012. "Portfolio separation and the dynamics of bank interest rates," Scottish Journal of Political Economy, Scottish Economic Society, vol. 59(1), pages 28-46, February.
    2. Enzo Dia, 2002. "A Reconciliation of the Evidence about Bank Lending with Portfolio Theory," Working Papers 56, University of Milano-Bicocca, Department of Economics, revised Sep 2002.
    3. Enzo Dia, 2004. "Monopolistic Pricing in the Banking Industry: a Dynamic Model," Working Papers 73, University of Milano-Bicocca, Department of Economics, revised May 2004.
    4. Enzo Dia, 2004. "Monopolistic Pricing in the Banking Industry: a Dynamic Portfolio Model," Finance 0411025, University Library of Munich, Germany.
    5. Deng, Wei & Gao, Lei & Xing, Fei & Yang, Ming, 2023. "Economic policy uncertainty, bank deposits, and liability structure," Emerging Markets Review, Elsevier, vol. 55(C).
    6. Enzo Dia, 2004. "Imperfect Information and Monopolistic Pricing in the Banking Industry," Working Papers 74, University of Milano-Bicocca, Department of Economics, revised May 2004.
    7. Dia, Enzo, 2013. "How do banks respond to shocks? A dynamic model of deposit-taking institutions," Journal of Banking & Finance, Elsevier, vol. 37(9), pages 3623-3638.
    8. Massimo Giulidori & Enzo Dia, 2009. "The Determinants of Bank Interest Margins: Estimates of a Dynamic Model," Working Papers 157, University of Milano-Bicocca, Department of Economics, revised Mar 2009.

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