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

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

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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File URL: http://www.nber.org/papers/t0124.pdf
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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
Date of revision:
Publication status: published as Journal of Finance, Vol. 70, February 1994, pp. 80-102.
Handle: RePEc:nbr:nberte:0124
Note: AP
Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
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Web page: http://www.nber.org
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  1. Ferson, Wayne E & Harvey, Campbell R, 1992. " Seasonality and Consumption-Based Asset Pricing," Journal of Finance, American Finance Association, vol. 47(2), pages 511-52, June.
  2. 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, vol. 5(3), pages 315-27, July.
  3. David K. Backus & Allan W. Gregory & Chris I. Telmer, 1990. "Accounting for Forward Rates in Markets for Foreign Currency," Working Papers 792, Queen's University, Department of Economics.
  4. Lars Peter Hansen & Ravi Jagannathan, 1990. "Implications of security market data for models of dynamic economies," Discussion Paper / Institute for Empirical Macroeconomics 29, Federal Reserve Bank of Minneapolis.
  5. Sanford J. Grossman & Robert J. Shiller, 1980. "The Determinants of the Variability of Stock Market Prices," NBER Working Papers 0564, National Bureau of Economic Research, Inc.
  6. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
  7. Luttmer, Erzo G J, 1996. "Asset Pricing in Economies with Frictions," Econometrica, Econometric Society, vol. 64(6), pages 1439-67, November.
  8. Breeden, Douglas T & Gibbons, Michael R & Litzenberger, Robert H, 1989. " Empirical Tests of the Consumption-Oriented CAPM," Journal of Finance, American Finance Association, vol. 44(2), pages 231-62, June.
  9. Bekaert, Geert & Hodrick, Robert J, 1992. " Characterizing Predictable Components in Excess Returns on Equity and Foreign Exchange Markets," Journal of Finance, American Finance Association, vol. 47(2), pages 467-509, June.
  10. 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.
  11. Wayne E. Ferson & George M. Constantinides, 1991. "Habit Persistence and Durability in Aggregate Consumption: Empirical Tests," NBER Working Papers 3631, National Bureau of Economic Research, Inc.
  12. Kocherlakota, Narayana R., 1990. "On the 'discount' factor in growth economies," Journal of Monetary Economics, Elsevier, vol. 25(1), pages 43-47, January.
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