User cost of credit card services under risk with intertemporal nonseparability

William Barnett and Jinan Liu

Journal of Financial Stability, 2019, vol. 42, issue C, 18-35

Abstract: This paper derives the user cost of monetary assets and credit card services with interest rate risk under the assumption of intertemporal non-separability. Barnett and Su (2016) derived theory permitting inclusion of credit card transaction services into Divisia monetary aggregates. The risk adjustment in their theory is based on consumption capital asset pricing model (CCAPM) under intertemporal separability. The equity premium puzzle focusses on downward bias in the CCAPM risk adjustment to common stock returns. Despite the high risk of credit card interest rates, the risk adjustment under the CCAPM assumption of intertemporal separability might nevertheless be similarly small. While the known downward bias of CCAPM risk adjustments are of little concern with Divisia monetary aggregates containing only low risk monetary assets, that downward bias cannot be ignored, once high risk credit card services are included. We believe that extending to intertemporal non-separability could provide a non-negligible risk adjustment, as has been emphasized by Barnett and Wu (2015).

Keywords: Divisa index; Monetary aggregation; Intertemporal non-separability; Credit card services; Risk adjustment (search for similar items in EconPapers)
JEL-codes: C43 D81 E03 E40 E41 E44 E51 G12 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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Related works:
Working Paper: User Cost of Credit Card Services under Risk with Intertemporal Nonseparability (2017)
Working Paper: User Cost of Credit Card Services under Risk with Intertemporal Nonseparability (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:42:y:2019:i:c:p:18-35

DOI: 10.1016/j.jfs.2019.05.005

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