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The Size of the Permanent Component of Asset Pricing Kernels

  • Alvarez, Fernando

    (University of Chicago and Universidad Torcuato Di Tella)

  • Jermann, Urban J.

    (University of Pennsylvania)

We derive a lower bound for the size of the permanent component of 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 large; its volatility is about the same as the volatility of the stochastic discount factor. We also show that, for many cases where the pricing kernel is a function of consumption, innovations to consumption need to have permanent effects.

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Paper provided by University of Pennsylvania, Wharton School, Weiss Center in its series Working Papers with number 01-4.

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Date of creation: Nov 2001
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Handle: RePEc:ecl:upafin:01-4
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  1. Campbell, John, 1996. "Understanding Risk and Return," Scholarly Articles 3153293, Harvard University Department of Economics.
  2. Ferson, Wayne E. & Constantinides, George M., 1991. "Habit persistence and durability in aggregate consumption: Empirical tests," Journal of Financial Economics, Elsevier, vol. 29(2), pages 199-240, October.
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  6. Gary D. Hansen, 1989. "Technical Progress and Aggregate Fluctuations," UCLA Economics Working Papers 546, UCLA Department of Economics.
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  15. Alvarez, Fernando & Jermann, Urban J., 2001. "The Size of the Permanent Component of Asset Pricing Kernels," Working Papers 01-4, University of Pennsylvania, Wharton School, Weiss Center.
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