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Using Asset Prices to Measure the Persistence of the Marginal Utility of Wealth

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  • Fernando Alvarez
  • Urban J. Jermann

Abstract

We derive a lower bound for the volatility of the permanent component of investors' marginal utility of wealth or, more generally, asset pricing kernels. The bound is based on return properties of long-term zero-coupon bonds, risk-free bonds, and other risky securities. We find the permanent component of the pricing kernel to be very volatile; its volatility is about at least as large as the volatility of the stochastic discount factor. A related measure for the transitory component suggest it to be considerably less important. We also show that, for many cases where the pricing kernel is a function of consumption, innovations to consumption need to have permanent effects. Copyright The Econometric Society 2005.

Suggested Citation

  • Fernando Alvarez & Urban J. Jermann, 2005. "Using Asset Prices to Measure the Persistence of the Marginal Utility of Wealth," Econometrica, Econometric Society, vol. 73(6), pages 1977-2016, November.
  • Handle: RePEc:ecm:emetrp:v:73:y:2005:i:6:p:1977-2016
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