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CAPM RISK ADJUSTMENT FOR EXACT AGGREGATION OVER FINANCIAL ASSETS

Published online by Cambridge University Press:  02 March 2005

WILLIAM A. BARNETT ,
YI LIU  and
MARK JENSEN
WILLIAM A. BARNETT
Affiliation:
Washington University in St. Louis
YI LIU
Affiliation:
University of South Alabama
MARK JENSEN
Affiliation:
University of Missouri
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Extract

Barnett originated the Divisia monetary aggregates, which in continuous time exactly track any monetary aggregator function under perfect certainty. With user costs measuring the prices of the services of components, Barnett's aggregates are based on Francois Divisia's derivation of the Divisia line integral from the first-order conditions for optimizing behavior by economic agents under perfect certainty. We derive an extended Divisia index from the first-order conditions (Euler equations) that apply under risk. Our extended Divisia index is the first extension of index number theory into the domain of decision making under risk and thereby produces a route for the extension of all index number theory to permit non-risk-neutrality. We generate simulated data from a modeled rational consumer and investigate the tracking accuracy of the extended Divisia index to the consumer's exact aggregator function.

Keywords

AggregationIndex Number TheoryRiskCapital Asset Pricing
Type
Research Article
Information
Macroeconomic Dynamics , Volume 1 , Issue 2 , June 1997 , pp. 485 - 512
Copyright
© 1997 Cambridge University Press

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