Estimating portfolio models from financial flow data: An analysis of the demand for liabilities, real assets and financial assets by the household sector

Abstract

The purpose of this paper is to examine some of the factors which are influential in the borrowing, lending and investment behaviour of the Australian household sector. Since these decisions are essentially about choosing how to hold wealth, our model is based on the theory of portfolio selection. However, the estimation of the model is hampered by the lack of readily available disaggregated data on holdings of wealth and the difficulty of generating the required data. In this paper, we exploit an alternative source of data provided by the tables of financial flows. We show how to respecify the portfolio model containing equations describing the demand for stocks of assets into an econometric model describing the determinants of financial flows. As an illustration we derive estimates of household demand for liabilities, real assets and financial assets but the approach is sufficiently general to encompass other institutions and a more disaggregated classification of assets.