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On User Costs of Risky Monetary Assets

Author Info

Listed author(s):
  • 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://econwpa.repec.org/eps/mac/papers/0406/0406009.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0406009.

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Length: 26 pages
Date of creation: 24 Jun 2004
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.
Contact details of provider: Web page: http://econwpa.repec.org

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

Other versions of this item:

Find related papers by JEL classification:
  • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
  • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
  • C43 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Index Numbers and Aggregation
  • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes

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References listed on IDEAS
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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 427-465, June.
  2. William Barnett & Apostolos Serletis & W. Erwin Diewert, 2005. "The Theory of Monetary Aggregation (book front matter)," Macroeconomics 0511008, EconWPA.
  3. repec:cup:macdyn:v:1:y:1997:i:2:p:513-17 is not listed on IDEAS
  4. William A. Barnett, 2003. "Aggregation-Theoretic Monetary Aggregation over the Euro Area, when Countries are Heterogeneous," Macroeconomics 0309018, EconWPA.
  5. Lamont, Owen A., 2001. "Economic tracking portfolios," Journal of Econometrics, Elsevier, vol. 105(1), pages 161-184, November.
  6. 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.
  7. Campbell, John Y, 1996. "Understanding Risk and Return," Journal of Political Economy, University of Chicago Press, vol. 104(2), pages 298-345, April.
  8. 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.
  9. William Barnett, 2005. "Monetary Aggregation," Macroeconomics 0503017, EconWPA.
  10. William A. Barnett & Yi Liu, 1996. "Beyond the Risk Neutral Utility Function," Macroeconomics 9602001, EconWPA.
  11. William A. Barnett & Melvin J. Hinich & Piyu Yue, 2011. "The Exact Theoretical Rational Expectations Monetary Aggregate," World Scientific Book Chapters,in: Financial Aggregation And Index Number Theory, chapter 2, pages 53-84 World Scientific Publishing Co. Pte. Ltd..
  12. 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.
  13. 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.
  14. William A. Barnett, 2003. "Aggregation-Theoretic Monetary Aggregation over the Euro Area, when Countries are Heterogeneous," Macroeconomics 0309018, EconWPA.
  15. Lewis, Mervyn K. & Mizen, Paul D., 2000. "Monetary Economics," OUP Catalogue, Oxford University Press, number 9780198290629, April.
  16. William A. Barnett & Jane Binner & W. Erwin Diewert, 2005. "Functional Structure and Approximation in Econometrics (book front matter)," Econometrics 0511006, EconWPA.
  17. repec:cup:macdyn:v:4:y:2000:i:2:p:197-221 is not listed on IDEAS
  18. Douglas T. Breeden & Michael R Gibbons & Robert H. Litzenberger, "undated". "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.
  19. 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.
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