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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. Snow, Karl N, 1991. " Diagnosing Asset Pricing Models Using the Distribution of Asset Returns," Journal of Finance, American Finance Association, vol. 46(3), pages 955-83, July.
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  5. repec:ecl:upafin:01-4 is not listed on IDEAS
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  10. Alvarez, Fernando & Jermann, Urban J., 2000. "Using Asset Prices to Measure the Cost of Business Cycles," Working Papers 00-1, University of Pennsylvania, Wharton School, Weiss Center.
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  25. Fernando Alvarez & Urban J. Jermann, 2000. "Efficiency, Equilibrium, and Asset Pricing with Risk of Default," Econometrica, Econometric Society, vol. 68(4), pages 775-798, July.
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  30. Kazemi, Hossein B, 1992. "An Intertemporal Model of Asset Prices in a Markov Economy with a Limiting Stationary Distribution," Review of Financial Studies, Society for Financial Studies, vol. 5(1), pages 85-104.
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