Determinants of Depositor Demand for the Texas Local Government Investment Pool

Abstract

Local government investment pools (LGIP's) provide the political subdivisions of a state with a cost‐effective option for investing their daily cash balances in an income‐producing fund. LGIP's have grown into a $250 billion dollar industry in 44 states. This study reports on the factors that affect demand by depositors using time series data from TexPool. The results show that the yield spread of LGIP's has a nonlinear relationship with demand, the pool's liquidity was inversely related to demand, and TexPool's average monthly yield levels had no effect on demand. This study supports the normative values expected of local government investors — priority on safety and liquidity of principal. Outsourcing of the fund's management and aligning the pool's average maturity to the purpose of the pool brought a high level of confidence in the fund as seen by the substantial growth in both the average balance of investments and the number of depositors.