The portfolio of the major trading banks : an econometric analysis
Date
1982
Authors
Lim, Guay Cheng
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Abstract
The Australian trading banks are prominent financial intermediaries
of the monetary sector and their portfolio behaviour has implications
for monetary policy. The purpose of this study is to develop and
estimate a short-run (monthly) model of bank portfolio choice.
Since the pioneering article by Markowitz and Tobin, mean-variance
analysis has been the primary theory of portfolio selection. The
resultant optimum portfolio, though desired, need not be attainable in
the short-run and the generalised-adjustment mechanism became a popular
way of explaining observed portfolios.
While the mean-variance generalised-adjustment framework consti tutes
the skeleton of the portfolio model for the Major Trading Banks, it is
limited in its applicability, as it obviously fails to take into account
the institutional features of the Australian banking system. A s ynthesis
of portfolio and banking theories has been attempted.
An interesting feature of the model proposed is that it is a priori
triangular. This ralses the question of recursivity and the Lagrange
Multiplier test for recursivity is discussed in the context of a
triangular model with lagged endogeneous variables and autocorrelated
errors.
A variety of methods has been suggested for the estimation of
portfolio models and in general iterative techniques are needed to handle
the complications caused by the presence of lagged endogeneous variables,
autocorrelated errors and non-linear restrictions on the parameter set.
The problem with iterative (greater than two steps) methods is that convergence is not guaranteed. A Hatanaka (portfolio) estimator is
proposed.
Empirical results support the bank portfolio management model
developed and the study concluded with a discussion on portfolio
adjustment, the money supply and monetary policy.
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DOI
10.25911/5d74e073de1c0