Portfolio choice and financial markets in New Zealand 1955-56 - 1968-69

Abstract

This thesis describes an econometric investigation into financial markets and portfolio choice over the period 1955-56 to 1968-69. The theoretical framework adopted for the investigation draws heavily from the literature on portfolio choice surveyed in chapter 2, and in particular, from the monetary articles of James Tobin. The portfolios selected by the trading banks, the non-banking financial institutions and the non-financial private sector are successfully explained by variables representing real expected asset yields and the degree of credit rationing in the market for trading bank advances.

A key variable influencing behaviour was found to be Tobin's supply price of capital, defined as that rate of return the community of wealth owners requires in order to absorb the existing stock of capital into its portfolio. Deviations of the supply price of capital from the marginal productivity of capital were found to stimulate the sort of responses expected from Tobin's articles.

The many time series constructed and drawn together for this investigation are described in appendix A. Chapter 3 analyses trends in the portfolios of the three groups listed above. Theoretical considerations, data limitations and institutional details are combined in chapter 4 to produce a macroeconomic model comprising 60 equations including 27 identities.

The equations of principal interest in the model are estimated by two stage least squares as described in chapter 5. Because not all equations were estimated the overall specification and properties of the model cannot be comprehensively evaluated. Particular attention is given in the estimation procedure to the balance sheet requirement, that total assets equal total liabilities at all times. Chapters 6 and 7 present, respectively, the estimation results and conclusions.