publication . Article . 2005

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

Fernando Alvarez; Urban J. Jermann;
Open Access
  • Published: 11 Oct 2005 Journal: Econometrica, volume 73, pages 1,977-2,016 (issn: 0012-9682, eissn: 1468-0262, Copyright policy)
  • Publisher: The Econometric Society
Abstract
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 permane...
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Subjects
free text keywords: Economics and Econometrics, Marginal utility, Volatility smile, Economics, Consumption-based capital asset pricing model, Capital asset pricing model, Volatility swap, Econometrics, Stochastic discount factor, Stochastic volatility, Volatility (finance)
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