Mixed Models and the General Utility Approach

Neil Thompson
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Neil Thompson: University of Salford

Chapter 4 in Portfolio Theory and the Demand for Money, 1993, pp 42-48 from Palgrave Macmillan

Abstract: Abstract Both the risk-return and transactions cost approaches to portfolio analysis concentrate on particular themes as the basis for asset diversification. This may be deemed to be unduly restrictive; in practice, portfolio holders choose from a large set of assets, with characteristics which can often neither be solely represented by mean-variance space nor differences in liquidity and associated transactions costs. A more theoretically consistent solution lies in the formulation of mixed models, which combine elements of both approaches. However this type of approach is likely to result in demand functions which are not empirically tractable and consequently there have been few attempts to develop such models. Exceptions are the models of Buiter and Armstrong (1978) and Spencer (1984). Buiter and Armstrong utilise the Baumol inventory-theoretic model of money demand, but assume an uncertain return on the bond. The demand for money is shown to depend upon a mixture of transactions and risk-return variables; the former consisting of income and the brokerage fee, and the latter the expected return and the standard deviation of the return on the risky asset.

Keywords: Price Level; Risky Asset; Capital Gain; Money Demand; Portfolio Theory (search for similar items in EconPapers)
Date: 1993
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Persistent link: https://EconPapers.repec.org/RePEc:pal:palchp:978-1-349-22827-0_4

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DOI: 10.1007/978-1-349-22827-0_4

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