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

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

Abstract

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.

Suggested Citation

  • Stephen G. Cecchetti & Pok-sang Lam & Nelson C. Mark, 1992. "Testing Volatility Restrictions on Intertemporal Marginal Rates of Substitution Implied by Euler Equations and Asset Returns," NBER Technical Working Papers 0124, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberte:0124
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