An empirical study on investors’ preferences for liquid assets

Abstract

The present study seeks to analyze the demand for liquid assets under the assumption that holdings of money, U.S. Treasuries, and corporate debt securities directly contribute to investors utility. Specifically, the representative agent' s utility function includes a separate argument denoted as "liquidity services" which depends on the level of liquid asset holdings. First, this paper presents results from nonparametric tests of investors behavior - namely tests for utility maximization, and tests for weak separability. I find that monthly per capita data on consumption, money balances, and holdings of U.S. Treasuries, and corporate debt securities are consistent with utility maximization and weak separability. The second part of the empirical analysis employs Generalized Method of Moments to estimate coefficients of Euler equations which are derived from a variety of specifications of the representative agent s modified utility function. Further, to find the most suitable functional form, parameter estimates are compared across different specifications and different data sets. However, only the most restrictive utility specification yields parameter estimates which are relatively robust to the choice of data, while in some cases the estimates differ from those known from the literature.