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User cost of foreign monetary assets under dollarization

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  • Yemba, Boniface P.

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).

Suggested Citation

  • Yemba, Boniface P., 2022. "User cost of foreign monetary assets under dollarization," Finance Research Letters, Elsevier, vol. 49(C).
    • Handle: RePEc:eee:finlet:v:49:y:2022:i:c:s154461232200263x
    DOI: 10.1016/j.frl.2022.103023
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    References listed on IDEAS

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    More about this item

    Keywords

    User costs; CAPM; Monetary aggregation; Currency risk premium; Dollarization;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • 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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