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The CAPM-Extended Divisia Monetary Aggregate with Exact Tracking under Risk

Author

Listed:
  • William A. Barnett

    (Washington University in St. Louis)

  • Yi Liu

    (University of S. Alabama)

Abstract

This paper extends the field of index number theory to the case of risk, by deriving the Divisia index from the Euler equations under risk, rather than from the first order conditions under perfect certainty, as was done by Francois Divisia. The result is an extended Divisia index which corrects for risk by subtracting from each risky user cost price a CCAPM beta term. The formula is derived and illustrated in terms of aggregation over monetary assets that yield risky return paid at the end of the period. Hence the beta correction is a function of the covariance between each rate of return and the consumption stream, and also depends upon the degree of risk aversion.

Suggested Citation

  • William A. Barnett & Yi Liu, 1996. "The CAPM-Extended Divisia Monetary Aggregate with Exact Tracking under Risk," Finance 9602001, EconWPA.
  • Handle: RePEc:wpa:wuwpfi:9602001 Note: Type of Document - Microsoft Word; prepared on Macintosh; to print on Postscript; pages: 24 ; figures: None.. See
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Barnett, William A, 1997. "Which Road Leads to Stable Money Demand?," Economic Journal, Royal Economic Society, vol. 107(443), pages 1171-1185, July.
    2. William A. Barnett & Yi Liu, 1996. "Beyond the Risk Neutral Utility Function," Macroeconomics 9602001, EconWPA.
    3. Wesche, Katrin, 1996. "Aggregating Money Demand in Europe with a Divisia Index," Discussion Paper Serie B 392, University of Bonn, Germany.
    4. Obben, James & Nugroho, Agus Eko, 2003. "Determinants Of The Funding Volatility Of Indonesian Banks: A Dynamic Model," Discussion Papers 23700, Massey University, Department of Applied and International Economics.
    5. Binner, Jane & Elger, Thomas & de Peretti, Philipe, 2002. "Is UK Risky Money Weakly Separable? A Stochastic Approach," Working Papers 2002:13, Lund University, Department of Economics.

    More about this item

    Keywords

    CAPM Divisia aggregation index risk money;

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates

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