Modelling the demand for financial assets: The case of Sri Lanka

This paper uses a portfolio allocation model to analyse the demand for household financial assets in the form of bank deposits, savings and term deposits for an emerging market, Sri Lanka, for the period 1981–2022. In contrast to previous research, findings reveal the presence of a non-linear relationship between household financial assets and share of asset allocation. The findings also suggest some degree of substitutability and complementarity between household bank investments. The findings of this study inform monetary policy decisions to encourage household savings in times of highly volatile political and economic conditions, such as civil wars and economic crises. • Portfolio allocation model is used to analyse the demand for household financial assets in Sri Lanka. • A non-linear relationship between the household financial assets and share of asset allocation exists. • Results suggest some degree of substitutability and complementarity between household bank investments. • Civil war positively affected household savings behaviour. • Economic crisis has negatively affected household investments in bank deposits.