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On user costs of risky monetary assets

  • William A. Barnett


  • Shu Wu


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). Copyright Springer-Verlag Berlin Heidelberg 2005

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Article provided by Springer in its journal Annals of Finance.

Volume (Year): 1 (2005)
Issue (Month): 1 (01)
Pages: 35-50

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Handle: RePEc:kap:annfin:v:1:y:2005:i:1:p:35-50
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  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.
  6. John Y. Campbell, 1993. "Understanding Risk and Return," NBER Working Papers 4554, National Bureau of Economic Research, Inc.
  7. 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.
  8. William Barnett, 2005. "Monetary Aggregation," WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS 200510, University of Kansas, Department of Economics, revised Mar 2005.
  9. William Barnett & Apostolos Serletis & W. Erwin Diewert, 2005. "The Theory of Monetary Aggregation (book front matter)," Macroeconomics 0511008, EconWPA.
  10. William A. Barnett & Yi Liu, 1996. "Beyond the Risk Neutral Utility Function," Macroeconomics 9602001, EconWPA.
  11. William A. Barnett & Jane Binner & W. Erwin Diewert, 2005. "Functional Structure and Approximation in Econometrics (book front matter)," Econometrics 0511006, EconWPA.
  12. Barnett, William A., 2003. "Aggregation-theoretic monetary aggregation over the euro area, when countries are heterogeneous," Working Paper Series 0260, European Central Bank.
  13. Lewis, Mervyn K. & Mizen, Paul D., 2000. "Monetary Economics," OUP Catalogue, Oxford University Press, number 9780198290629.
  14. 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.
  15. repec:cup:macdyn:v:4:y:2000:i:2:p:197-221 is not listed on IDEAS
  16. Owen Lamont, . "Economic Tracking Portfolios."," CRSP working papers 489, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  17. repec:cup:macdyn:v:1:y:1997:i:2:p:513-17 is not listed on IDEAS
  18. 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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