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Testing Volatility Restrictions on Intertemporal Marginal Rates of Substitution Implied by Euler Equations and Asset Returns

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  • Stephen G. Cecchetti
  • Pok-sang Lam
  • Nelson C. Mark

Abstract

The Euler equations derived from a broad range of intertemporal asset pricing models, together with the first two unconditional moments of asset returns, imply a lower bound on the volatility of the intertemporal marginal rate of substitution. We develop and implement statistical tests of these lower bound restrictions. We conclude that the availability of relatively short time series of consumption data undermines the ability of tests that use the restrictions implied by the volatility bound to discriminate among different utility functions.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0124.

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Date of creation: Jul 1992
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Publication status: published as Journal of Finance, Vol. 70, February 1994, pp. 80-102.
Handle: RePEc:nbr:nberte:0124

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  1. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(2), pages 225-62, April.
  2. David K. Backus & Allan W. Gregory & Chris I. Telmer, 1990. "Accounting for Forward Rates in Markets for Foreign Currency," Working Papers, Queen's University, Department of Economics 792, Queen's University, Department of Economics.
  3. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, Econometric Society, vol. 55(3), pages 703-08, May.
  4. S. Grossman & R. Shiller, . "The Determinants of the Variability of Stock Market Price," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 18-80, Wharton School Rodney L. White Center for Financial Research.
  5. Ferson, Wayne E. & Constantinides, George M., 1991. "Habit persistence and durability in aggregate consumption: Empirical tests," Journal of Financial Economics, Elsevier, Elsevier, vol. 29(2), pages 199-240, October.
  6. Geert Bekaert & Robert J. Hodrick, 1991. "Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange Markets," NBER Working Papers 3790, National Bureau of Economic Research, Inc.
  7. Snow, Karl N, 1991. " Diagnosing Asset Pricing Models Using the Distribution of Asset Returns," Journal of Finance, American Finance Association, American Finance Association, vol. 46(3), pages 955-83, July.
  8. Breeden, Douglas T & Gibbons, Michael R & Litzenberger, Robert H, 1989. " Empirical Tests of the Consumption-Oriented CAPM," Journal of Finance, American Finance Association, American Finance Association, vol. 44(2), pages 231-62, June.
  9. Kocherlakota, Narayana R., 1990. "On the 'discount' factor in growth economies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 25(1), pages 43-47, January.
  10. Luttmer, Erzo G J, 1996. "Asset Pricing in Economies with Frictions," Econometrica, Econometric Society, Econometric Society, vol. 64(6), pages 1439-67, November.
  11. Grossman, S J & Melino, Angelo & Shiller, Robert J, 1987. "Estimating the Continuous-Time Consumption-Based Asset-Pricing Model," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 5(3), pages 315-27, July.
  12. Ferson, Wayne E & Harvey, Campbell R, 1992. " Seasonality and Consumption-Based Asset Pricing," Journal of Finance, American Finance Association, American Finance Association, vol. 47(2), pages 511-52, June.
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