User cost of foreign monetary assets under dollarization

Boniface Yemba

Finance Research Letters, 2022, vol. 49, issue C

Abstract: We use a Capital Asset Price Model (CAPM) model to derive the formula of user cost for foreign monetary asset whose rates of return are subject to foreign exchange risk premia. Our formula shows that only domestic non-monetary asset can be used as the benchmark asset. In fact, under dollarization the local currency’ assets offer a higher risk premium and return over the dollar denominated one because the latter is preferred over the first for hedging motives. Using data from Chile (from June 2003 to January 2022) and Croatia (from December 2011 to March 2022), our results show that the inclusion of the currency risk premium has improved substantially the formula proposed by Barnett (1978).

Keywords: User costs; CAPM; Monetary aggregation; Currency risk premium; Dollarization (search for similar items in EconPapers)
JEL-codes: C22 C43 E41 F31 G12 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S154461232200263X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:49:y:2022:i:c:s154461232200263x

DOI: 10.1016/j.frl.2022.103023

Access Statistics for this article

Finance Research Letters is currently edited by R. Gençay

More articles in Finance Research Letters from Elsevier
Bibliographic data for series maintained by Catherine Liu ().