Determinants of Asset Demand
Determinants of asset demand refer to the factors that influence individuals' and firms' decisions to hold financial assets. These determinants include the expected rate of return on the asset, the level of risk associated with the asset, liquidity preferences, and wealth. Changes in these determinants can lead to shifts in the demand for various types of financial assets.
5 Key excerpts on "Determinants of Asset Demand"
eBook - ePubDemographics Unravelled
How Demographics Affect and Influence Every Aspect of Economics, Finance and Policy
- Amlan Roy(Author)
- 2021(Publication Date)
- Wiley(Publisher)
...The depth of capital markets and behaviour of savers and investors help determine asset prices. Our broader interpretation of demographics pertaining to consumer and worker characteristics means the behaviour of individuals, households, and families as both consumers and workers influence inflation and wages. Additionally, the consumption, savings, and investments of individuals and households help determine asset demand, whereas asset supply depends on the financing needs of institutions, corporations, and governments along with equity and bond markets, exchanges, index providers, trading structures, and regulation. How much an individual consumer or household should consume and save depends on their preferences toward consumption (how they trade off a unit of consumption in the present versus a unit of consumption in the future), which is captured by their degree of impatience about consuming today versus in the future and their attitude about risk: their degree of risk aversion. Decisions are typically made with implications in terms of returns or future income. Savings decisions are made keeping in mind intergenerational considerations such as bequests. 4.1 Theories of Life-Cycle Consumption, Savings, and the Permanent Income Hypothesis 4.1.1 Life-Cycle Consumption Theory As we discussed in the earlier chapters, life expectancy has dramatically increased since 1950 and continues to rise, although the rate of increase has slowed in the last two decades. Individuals and households make dynamic decisions about consumption and savings throughout their lives. Economists have been studying these decisions and devising tests of the decision-making processes. Individuals start consuming at birth, although until they are adults, their parents make consumption expenditure decisions for them...
eBook - ePub- Tom Craig, David Campbell(Authors)
- 2012(Publication Date)
- Routledge(Publisher)
...We may say, therefore, that the total demand for product A is 10,000 units a month if the price is 45 pennies per unit. Thus all three components must be in place before the demand can be said to be effective. The Determinants of Demand In seeking to answer the question why the demand for a product is as it is, we must explore the reasons behind consumer choices. We can intuitively appreciate that demand for goods and services varies, both according to the type of product and over time. There are five broad variables which determine the demand for any given product: the financial ability to pay; changing tastes and fashions (i.e. changing preferences); the prices of other, related products; the consumer’s perceptions of what will happen in the future; the type of product it is. We will examine each in turn. Ability To Pay The ability to pay for goods and services will obviously have a huge influence on demand. If consumers have a lot of spending power (or disposable income), demand for most products will rise. Conversely, if consumers are ‘hard up’, demand will tend to fall. The power of consumer spending will depend, among other things upon macroeconomic features such as: the level of wage or income increases, tax rates, interest rates, employment and unemployment levels in the country. Consumer Preferences The second determinant of demand is the changing face of consumer preferences. If financial issues determine the consumer’s ability to buy, preferences concern the consumer’s willingness to buy. It is obvious that people change over time in what they want to buy. It may be that one type of product is in demand 1 year, but not the next...
eBook - ePubFoundations of Macroeconomics
Its Theory and Policy
- Frederick S. Brooman(Author)
- 2017(Publication Date)
- Routledge(Publisher)
...The Consumer’S Assets and Liabilities An individual’s expenditure on consumption in any period, then, will depend on his temperament, his family circumstances, his age, and the total resources at his disposal during the period. There is an a priori expectation that his consumption will rise with the level of resources, though it will not rise in proportion – the larger the resources are, the smaller the proportion used in consumption. This relationship, however, implies a modification of the consumption functions introduced above, for they were written as if current income were the only resource available to the consumer. This assumption may be more or less true for many consumers, but clearly it does not hold for all. In addition to his income, the individual may have a stock of money on which he can draw; he may have made loans that he can call in; he may possess bonds and stock or physical assets such as real estate, which can be sold to finance consumption. In the analysis of macroeconomic equilibrium, the primary focus is on the influence of income on consumers’ demand, but it is evident that this relationship may need to be expanded to take account of the effect of other resources that the individual may have. All consumer-owned assets are not alike, of course. For example, if assets may have to be sold to finance consumption, the price the assets would fetch is important. If they would have to be offered much below their original cost to attract buyers, their owner may be disinclined to reckon them among his “resources” when deciding how much to consume. Other nonmoney assets may not be realizable at all for the time being. For example, a loan that has been made for a specified period cannot be “called” before the period ends, and in the meantime the lender may not be able to raise money by getting someone else to take his place as creditor; such assets cannot be used to finance consumption until they mature...
- David Blake(Author)
- 2014(Publication Date)
- Routledge(Publisher)
...Optimal portfolio selection is determined by (2.16): it implicitly solves optimal asset demands conditional on investor preferences (2 υ u / u m), expectations (ρ t *), risks (σ 2 лt, ξ t and Γ t) and wealth (w t *). Equation (2.16) will in general differ for different investors. Asset price forecasting is the other important component of portfolio behaviour because it is from asset price forecasting equations that the asset characteristics, expectations and risks, are derived. In theory, equilibrium asset prices are found by aggregating asset demands implicit in (2.16) over all investors, equating to asset supplies and solving for prices. Similarly, asset price forecasts can be derived from expected demands and supplies. However, this requires information on individual investor preferences, expectations, risks and wealth, all of which are unobservable in general. This procedure does not therefore provide, in general, a practical method for deriving an asset price forecasting model. In this section, we propose an alternative forecasting model which depends only on information which is observable to all asset market participants. We begin with the recognition that, while different investors’ asset demands may not be observable, the market outcomes, namely asset prices themselves, are observable. Further, we note that asset prices appear to respond to information that is also observable. We shall call these pieces of information to which asset prices respond ‘characteristic indicator variables’, because the asset characteristics ultimately depend on them. Suppose that the forecasting model for real domestically denominated asset returns depends on the following linear reduced form system for asset prices: The z t−1 are l characteristic indicator variables. The a 0 and A parameters relate the z t−1 to the real returns, and ε 0t and ε t are stochastic errors involved in this relationship. 6 Because the forecasts are one-period ahead, the zs must be dated t−1 or earlier...
eBook - ePub- Ralph Turvey(Author)
- 2022(Publication Date)
- Routledge(Publisher)
...If the special cases which produce occasional rather recherche exceptions are ignored, they require two major assumptions about the nature of asset demand. The first of these is that if wealth increases, given constant relative asset prices, the demand for all assets will increase. The second assumption is that given total wealth, a fall in the relative price of any one asset will increase the demand for it. Let us adopt the assumptions, and start by supposing that all assets are superior with respect to wealth and that all assets are substitutes for money (though not necessarily for all other assets as well). Now a rise in the price of any asset relatively to the price of money implies a rise in the money price of the asset; the price of money cannot fall because it is always unity. This enables us to go a little beyond the general propositions mentioned above. Ceteris paribus any of the following differences in the given elements of the situation will make the equilibrium price of asset X higher in absolute money terms: a reduction in the quantity of X; an increased desire to hold X; a greater initial holding of assets (or smaller holding of debts) by people whose desire to hold X is particularly strong; an increase in the quantity of money; a decreased desire to hold money, for example in consequence of a reduction in the aggregate value of transactions. Now this theory, although not trivial, is not very useful as it stands. It is too general. What is needed, therefore, is a more down to earth analysis in terms of the actual assets existing in the economy as we know it. This in turn requires that the analysis be made highly aggregative, for only thus can it be expressed in a comprehensible manner. If the degree of aggregation were low there would be too many variables to handle. The purpose of this book is to present the theory usefully and simply...
