User Cost of Credit Card Services under Risk with Intertemporal Nonseparability
William Barnett () and
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Jinan Liu: Department of Economics, The University of Kansas;
No 201705, WORKING PAPERS SERIES IN THEORETICAL AND APPLIED ECONOMICS from University of Kansas, Department of Economics
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 CCAPM1 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: Divisia monetary aggregation; monetary aggregation theory; multilateral aggregation. (search for similar items in EconPapers)
JEL-codes: C43 C82 D12 E51 F33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ban and nep-mac
Date: 2017-09, Revised 2017-09
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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:kan:wpaper:201705
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