Capital Flow Analysis: Multi-Player, Flow of Funds Market Model

Basics of Capital Flow Analysis: Multi-player flow of funds market model Multi-player, Flow of Funds Market Model

The Multi-Player Market

The two-player market, with only an issuer and an investor, does not represent the real world.

We expect to see many types of investors, each group with different motivation.

Prices are determined not only between investors and issuers, but also between different kinds of investors.

We use the stock market in our examples, since this is the common application of Capital Flow Analysis.

The same technique can be applied to securities other than equities.

In this lesson, we use simple, pro-forma flow tables to illustrate the technique.

You should check out actual current flow tables, using the links in the right column, to get an idea of what you will be facing in Capital Flow Analysis.

A Case Study: Corporate Equities

The instrument flow of funds table for corporate equities in table F.213, next below, shows three selling sectors in red (issuers, households, and private pension funds) and two buying sectors in green (mutual funds and insurance companies).

Note that total net sales (in red) are equal to total net purchases (in green).

brace: flow of funds
In real markets, issuers interact with many kinds of investors.
F.213 Corporate Equities
Year 1
Mutual Funds:
Private Pension Funds:
Insurance Companies:
brace: flow of funds

In instrument flow of funds tables, issuers are presumed sellers and investors are presumed buyers.

When issuers are buyers or when investors are sellers, the data is shown with a minus sign.

On this site, we use color-coded tables to make it easy to interpret the flow of funds accounts.

In instrument tables, a red background indicates sellers and a green background indicates buyers.

Drilling Down into the Sectors

In instrument table F.213 (above), we see that mutual funds bought a net $300 billion in corporate equities during 'Year 1'.

If we now look up the Mutual Funds sector table F.123 (below, next), we see that during 'Year 1', mutual funds issued a net $400 billion in new shares.

We also note mutual funds had invested a net $300 billion in corporate equity and $150 billion in bonds.

We also find that mutual funds disposed of a net $50 billion in open market paper.

In sector tables (market players), a blue background indicates a use of funds, while the yellow background indicates a source of funds.

brace: flow of funds
We should try to place the portfolio strategy of mutual funds in context ...
F.122 Mutual Funds
Year 1
Open Market Paper
Corporate Bonds
Corporate Equity
MF Shares Issued
brace: flow of funds

We can track mutual funds further by switching to the mutual fund instrument table F.214 (next, below), where we find that of the $400 billion shares issued (the table above), $300 billion of these shares were purchased by households, $50 billion by private pensions, and $50 billion by personal trusts.

brace: flow of funds
... and we see who was buying mutual fund shares.
F.214 Mutual Fund Shares
Year 1
Net Issues
Private Pensions
Personal Trusts
brace: flow of funds

All investors in corporate equities (table F.213) have sector tables (like F.122), but most do not have corresponding instrument tables (like F.214).

For example, there is no instrument table for households, since households are not issuers of securities.

The Basic Technique of Capital Flow Analysis

This example illustrates the basic technique of Capital Flow Analysis:

  1. Start with the instrument table (i.e., the security table) for the market that interests you. In this example, we started with Table F.213, the instrument flow table for corporate equities.
  2. From the left column of the instrument table, choose one of the sectors that appears to play a major role in the market during the period. In our example, we chose mutual funds.
  3. Next, go to the sector flow table for this market player. In this case, we go to sector flow table F.122 for Mutual Funds.
  4. Study the sector table to see the sources and uses of funds for that sector. This will help explain the motivation of this player.
  5. Finally, return to the initial instrument table (corporate equities, in our example), and choose another sector to examine. For example, we might choose Issuers, Households, Private Pension Funds, or Insurance Companies.
  6. Take notes and analyze each sector, observing the direction of security prices and the implications regarding sector motivation.

This process is the basic method of describing supply and demand in the capital market by means of Federal Reserve Flow of Funds Accounts.

As you can see, the process of Capital Flow Analysis is not particularly difficult.

However, it does require an understanding of flow of funds accounts and the patience to track flows from instrument tables to sector tables, taking notes as you go.

The Web of Motivation

By reading the sector tables for each of the players in the market that we are studying, in the light of market prices during the period, we begin to form a picture of the behavior of each sector.

This information must then be interpreted in light of long-term historical patterns of behavior, social and cultural change, and many other things that influence the various market players.

In a nutshell, this is the way we use Capital Flow Analysis to explain supply and demand in securities markets.


Before proceeding, check your progress:


An instrument flow table shows:
Choice 1Sources and uses of funds for a sector.
Choice 2The velocity of money flows.
Choice 3Net buyers and sellers of a financial asset.
Choice 4The viscosity of market liquidity.
A sector flow table shows:
Choice 1 Sources and uses of funds for a sector.
Choice 3 Net buyers and sellers of a financial asset.
Choice 2 Market liquidity as a pie chart.
Choice 4 Immigration across international frontiers.
The basic technique for Capital Flow Analysis starts with the flow table for a particular instrument and then goes to:
Choice 1 The level table for a different instrument .
Choice 2 Sector tables in the right column.
Choice 3 The instrument tables in the left column.
Choice 4 The employment statistics for the quarter.

Basics of Capital Flow Analysis  learning module : continued >

lesson: 1 | 2| 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10

Suggested Reading:

"Financial Markets and Institutions", Hardcover, Frederic S. Mishkin, Stanley G. Eakins

A good introductory text on capital market institutions.

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