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

  • Fernando Alvarez
  • Urban J. Jermann

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.

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Article provided by Econometric Society in its journal Econometrica.

Volume (Year): 73 (2005)
Issue (Month): 6 (November)
Pages: 1977-2016

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Handle: RePEc:ecm:emetrp:v:73:y:2005:i:6:p:1977-2016
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