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On User Costs of Risky Monetary Assets

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Author Info

  • William A. Barnett

    (University of Kansas)

  • Shu Wu

    (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 non-monetary 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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File URL: http://128.118.178.162/eps/mac/papers/0406/0406009.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0406009.

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Length: 26 pages
Date of creation: 24 Jun 2004
Date of revision:
Handle: RePEc:wpa:wuwpma:0406009

Note: Type of Document - pdf; pages: 26. This paper is forthcoming in volume 1, number 1, of the new journal, the Annals of Finance.
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Web page: http://128.118.178.162

Related research

Keywords: User costs; monetary aggregation; risk; intertemporal nonseparability; CCAPM; equity premium puzzle; Divisia monetary aggregates;

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References

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  1. 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.
  2. Lewis, Mervyn K. & Mizen, Paul D., 2000. "Monetary Economics," OUP Catalogue, Oxford University Press, number 9780198290629, September.
  3. William Barnett & Apostolos Serletis & W. Erwin Diewert, 2005. "The Theory of Monetary Aggregation (book front matter)," Macroeconomics 0511008, EconWPA.
  4. 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.
  5. John Y. Campbell, 1993. "Understanding Risk and Return," NBER Working Papers 4554, National Bureau of Economic Research, Inc.
  6. William A. Barnett & Jane Binner & W. Erwin Diewert, 2005. "Functional Structure and Approximation in Econometrics (book front matter)," Econometrics 0511006, EconWPA.
  7. repec:cup:macdyn:v:1:y:1997:i:2:p:513-17 is not listed on IDEAS
  8. William A. Barnett, 2003. "Aggregation-theoretic monetary aggregation over the Euro area; when countries are heterogeneous," Working Paper Series 260, European Central Bank.
  9. Lamont, Owen A., 2001. "Economic tracking portfolios," Journal of Econometrics, Elsevier, vol. 105(1), pages 161-184, November.
  10. John Y. Campbell & John H. Cochrane, 1994. "By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior," CRSP working papers 412, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  11. William A. Barnett & Yi Liu, 1996. "Beyond the Risk Neutral Utility Function," Macroeconomics 9602001, EconWPA.
  12. repec:cup:macdyn:v:4:y:2000:i:2:p:197-221 is not listed on IDEAS
  13. William Barnett, 2005. "Monetary Aggregation," Macroeconomics 0503017, EconWPA.
  14. 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.
  15. Narayana R. Kocherlakota, 1996. "The Equity Premium: It's Still a Puzzle," Journal of Economic Literature, American Economic Association, vol. 34(1), pages 42-71, March.
  16. 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.
  17. 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.
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