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On user costs of risy monetary assets

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  • William Barnett

    (Department of Economics, The University of Kansas)

  • Shu Wu

    (Department of Economics, The University of Kansas)

Abstract

We extend the monetary-asset user-cost risk adjustment of Barnett, Liu, and Jensen (1997) and their risk-adjusted Divisia monetary aggregates to the case of multiple non-monetary assets and intertemporal non-separability. Our model can generate potentially larger and more accurate CCAPM user-cost risk adjustments than those found in Barnett, Liu, and Jensen (1997). We show that the risk adjustment to a monetary asset¡¯s user cost can be measured easily by its beta. We show that any risky nonmonetary asset can be used as the benchmark asset, if its rate of return is adjusted in accordance with our formula. These extensions could be especially useful, when own rates of return are subject to exchange rate risk, as in Barnett (2003).

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Bibliographic Info

Paper provided by University of Kansas, Department of Economics in its series WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS with number 200404.

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Length: 26 pages
Date of creation: Jun 2004
Date of revision: Jun 2004
Handle: RePEc:kan:wpaper:200404

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Keywords: User costs; Monetary Aggregation; Risk; Pricing kernel; CAPM;

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References

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  1. Owen Lamont, . "Economic Tracking Portfolios."," CRSP working papers 489, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  2. William Barnett, 2005. "Monetary Aggregation," Macroeconomics 0503017, EconWPA.
  3. John Y. Campbell & John H. Cochrane, 1995. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," NBER Working Papers 4995, National Bureau of Economic Research, Inc.
  4. John Y. Campbell, 1993. "Understanding Risk and Return," NBER Working Papers 4554, National Bureau of Economic Research, Inc.
  5. Barnett, William A. & Liu, Yi & Jensen, Mark, 1997. "Capm Risk Adjustment For Exact Aggregation Over Financial Assets," Macroeconomic Dynamics, Cambridge University Press, vol. 1(02), pages 485-512, June.
  6. Kocherlakota, N., 1995. "The Equity Premium: It's Still a Puzzle," Working Papers 95-05, University of Iowa, Department of Economics.
  7. William Barnett & Apostolos Serletis & W. Erwin Diewert, 2005. "The Theory of Monetary Aggregation (book front matter)," Macroeconomics 0511008, EconWPA.
  8. William Barnett & Yi Liu, 2012. "Beyond the Risk Neutral Utility Function," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201216, University of Kansas, Department of Economics, revised Sep 2012.
  9. repec:cup:macdyn:v:4:y:2000:i:2:p:197-221 is not listed on IDEAS
  10. Barnett, William A., 2003. "Aggregation-theoretic monetary aggregation over the euro area, when countries are heterogeneous," Working Paper Series 0260, European Central Bank.
  11. William Barnett & Melvin J. Hinich & Piyu Yue, 2012. "The Exact Theoretical Rational Expectations Monetary Aggregate," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 201229, University of Kansas, Department of Economics, revised Sep 2012.
  12. John Y. Campbell & John Cochrane, 1999. "Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, University of Chicago Press, vol. 107(2), pages 205-251, April.
  13. Douglas T. Breeden & Michael R Gibbons & Robert H. Litzenberger, . "Empirical Tests of the Consumption-Oriented CAPM," Rodney L. White Center for Financial Research Working Papers 7-89, Wharton School Rodney L. White Center for Financial Research.
  14. Lewis, Mervyn K. & Mizen, Paul D., 2000. "Monetary Economics," OUP Catalogue, Oxford University Press, number 9780198290629, September.
  15. repec:cup:macdyn:v:1:y:1997:i:2:p:513-17 is not listed on IDEAS
  16. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
  17. William A. Barnett & Jane Binner & W. Erwin Diewert, 2005. "Functional Structure and Approximation in Econometrics (book front matter)," Econometrics 0511006, EconWPA.
  18. Fama, Eugene F & French, Kenneth R, 1992. " The Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 47(2), pages 427-65, June.
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