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Portfolio Behaviour in a Flow of Funds Model for the Household Sector in India

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  • Tomoe Moore
  • Christopher Green
  • Victor Murinde

Abstract

We estimate a flow of funds model for the household sector in India, within the Almost Ideal Demand System (AIDS) framework, and examine the demand for money and the substitution effects between money and other financial assets. The restricted long-run model, obtained using cointegration techniques, provides stable equilibrium relationship between I(1) variables and broadly satisfies the axioms of rational choice in consumer demand theory. We find that financial sector reform exerts a significant impact on the interest rate structure and household portfolio preferences; specifically, there is strong substitutability among risk-free assets and a possible speculative effect in the stock market, while the exchange rate strongly influences the demand for money. These findings all have important policy implications.

Suggested Citation

  • Tomoe Moore & Christopher Green & Victor Murinde, 2005. "Portfolio Behaviour in a Flow of Funds Model for the Household Sector in India," Journal of Development Studies, Taylor & Francis Journals, vol. 41(4), pages 675-702.
    • Handle: RePEc:taf:jdevst:v:41:y:2005:i:4:p:675-702
    DOI: 10.1080/00220380500092846
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    2. Bonizzi, Bruno, 2017. "Institutional investors’ allocation to emerging markets: A panel approach to asset demand," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 47(C), pages 47-64.
    3. Pentecost, Eric J & Moore, Tomoe, 2006. "Financial Liberalization in India and a New Test of the Complementarity Hypothesis," Economic Development and Cultural Change, University of Chicago Press, vol. 54(2), pages 487-502, January.
    4. Bashar Al-Zu'bi & Victor Murinde, 2011. "Household portfolio behaviour: evidence from Middle East economies," Applied Financial Economics, Taylor & Francis Journals, vol. 21(17), pages 1281-1289.
    5. Kuuluvainen, Jari & Korhonen, Jaana & Wang, Lanhui & Toppinen, Anne, 2021. "Wood market cartel in Finland 1997–2004: Analyzing price effects using the indicator approach," Forest Policy and Economics, Elsevier, vol. 124(C).

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