THE DEMAND FOR FINANCIAL ASSETS BY THE BRITISH LIFE FUNDS—A COMMENT*
| Author | J. C. DODDS |
| Published date | 01 May 1975 |
| DOI | http://doi.org/10.1111/j.1468-0084.1975.mp37002007.x |
| Date | 01 May 1975 |
THE DEMAND FOR FINANCIAL ASSETS BY THE
BRITISH LIFE FUNDSA COMMENT*
By J. C. DODDS
In a recent article in this journal' Dr. T. M. Ryan developed:
a general model of portfolio review, appropriate to institutional investors for
the purpose of analysing the acquisition of financial assets by the British Life
Funds.It is a disequilibrium partial adjustment model which focuses on the
problem of the optimal rate of portfolio adjustment when the market for
financial assets is imperfectly competitive. [(1) p. 61.]
Whilst Dr. Ryan has made a laudable attempt at developing a general model
of portfolio review the purpose of this Comment is to illustrate several short-
comings of the Ryan approach as well as to offer further background evidence on
life company portfolio behaviour. We begin with a general comment on the
specification of models to 'explain' financial institutions' portfolio behaviour, from
which our comments on Dr. Ryan's model follow naturally.
It would simplify life for the monetary economist if he could discover a model
that had universal applicability in 'explaining' the portfolio behaviour of all
institutional investors. However, intuition, economic theory, and the data on
the financial activities of these investors all lead us to the conclusion that no such
ideal state is attainable. Standard economic theory would suggest that if we are
to examine the participation of institutional investors on the financial markets we
need to consider at least two things at the outset: first we need to inquire into the
'behaviouristic background' of the institutions under study, namely its objective
or raison d'être; second, attention must be given to the constraints that might
impede the institution in its endeavours to meet its objective, such as liquidity
requirements which may be dictated by statutory requirements as in the case of
the l2% reserve ratio for banks and the 74% liquidity ratio for Building Societies.
For example, financial institutions may be attempting to maximize profits for a
particular level of 'risk' through shuffling their portfolio period by period; others
may be safety-first investors (very much 'risk averters') so that they hedge their
assets with liabilities. We may say that Commercial Banks and Discount Houses
are speculators and standard portfolio behaviour procedure models based on such
a behaviour which have provided reasonable empirical results explain the behaviour
of these institutions (see for example the work of J. M. Parkin [1], [2]). But such
speculative models do not have universal applicability and as an example we may
cite Building Societies, where it has been shown that a Parkin-type speculative
* The author gratefully acknowledges the financial assistance given by the Esmée Fairbairn
Charitable Trust. Professor J. L. Ford offered valuable comments on an earlier draft of this
note.T. M. Ryan 'The Demand for Financial Assets by the British Life Funds', Oxford Bulletin
of Economics and Statistics, Vol. 35, No. 1.
159
To continue reading
Request your trial