Evidence that Risk Adjustment is Unnecessary in Estimates of the User Cost of Money

摘要

Investors value the ?special attributes of monetary assets (e.g., ?exchangeability, liquidity, and safety) ?and pay a premium for holding them in the form of a lower return rate. The user cost of holding monetary assets can be measured approximately by the difference between the ?returns on illiquid risky assets and ?those of safer liquid assets. A more appropriate measure should adjust this difference by the ?differential risk of the ?assets in question. We investigate the ?impact that time ?non-separable preferences has on the ?estimation of the ?risk-adjusted user cost of money. Using U.K. data from 1965Q1 to 2011Q1, we estimate a habit-based asset pricing model ?with money ?in the utility function and ?find that the ?risk ?adjustment for risky monetary assets is negligible. Thus, researchers can dispense with risk adjusting the ?user cost of money ?in constructing monetary aggregate indexes.