ABSTRACT
This chapter considers the principle determinants of the demand for US Government securities by the depository financial intermediaries. The investor groups consist of commercial banks, mutual savings banks, and savings and loan associations. The chapter analyses several normative models that have been devised for the portfolio selection of depository financial intermediaries. A comparison is made between the normative models and prevailing portfolio selection practices. The chapter considers portfolio selection models that focus primarily on either the “pure” portfolio problem or the liquidity problem. Since the determinants of the demand for assets from “pure” portfolio selection considerations may be viewed as fundamental to any portfolio selection problem, they are incorporated into the specification that is used in the empirical analysis. In particular, the final specification utilizes a variant of the “pure” portfolio selection model to specify desired holdings of government securities.
