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On Cash-In-Advance Models of Money Demand and Asset Pricing (Reprint 007)


  • Henning Bohn


The paper shows how a cash-in-advance model of money demand can be written in a way that combines a simple, yet empirically defensible, money demand equation with tractability in asset pricing. Return premia are determined as in the standard barter exchange model, except that a short-term risk-free nominal interest rate enters into the first order condition. In special cases, asset prices satisfy the familiar barter-economy Euler equations exactly. Thus, contrary to much of the literature, money may not significantly affect asset pricing. Simple barter-economy Euler equations are approximately valid even in the presence of money.

Suggested Citation

  • Henning Bohn, "undated". "On Cash-In-Advance Models of Money Demand and Asset Pricing (Reprint 007)," Rodney L. White Center for Financial Research Working Papers 16-89, Wharton School Rodney L. White Center for Financial Research.
  • Handle: RePEc:fth:pennfi:16-89

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    References listed on IDEAS

    1. Stephen R. Foerster & Donald B. Keim, "undated". "Direct Evidence of Non-Trading of NYSE and AMEX Stocks," Rodney L. White Center for Financial Research Working Papers 19-93, Wharton School Rodney L. White Center for Financial Research.
    2. Christopher A. Sims, 1974. "Output and Labor Input in Manufacturing," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 5(3), pages 695-736.
    3. Andrew W. Lo, A. Craig MacKinlay, 1988. "Stock Market Prices do not Follow Random Walks: Evidence from a Simple Specification Test," Review of Financial Studies, Society for Financial Studies, vol. 1(1), pages 41-66.
    4. Kalman J. Cohen & Gabriel A. Hawawini & Steven F. Maier & Robert A. Schwartz & David K. Whitcomb, 1983. "Estimating and Adjusting for the Intervalling-Effect Bias in Beta," Management Science, INFORMS, vol. 29(1), pages 135-148, January.
    5. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
    6. Dimson, Elroy, 1979. "Risk measurement when shares are subject to infrequent trading," Journal of Financial Economics, Elsevier, vol. 7(2), pages 197-226, June.
    7. Chamberlain, Gary, 1983. "Funds, Factors, and Diversification in Arbitrage Pricing Models," Econometrica, Econometric Society, vol. 51(5), pages 1305-1323, September.
    8. Atchison, Michael D & Butler, Kirt C & Simonds, Richard R, 1987. " Nonsynchronous Security Trading and Market Index Autocorrelation," Journal of Finance, American Finance Association, vol. 42(1), pages 111-118, March.
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