Econometrica: Nov 2005, Volume 73, Issue 6

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

https://doi.org/10.1111/j.1468-0262.2005.00643.x
p. 1977-2016

Fernando Alvarez, Urban J. Jermann

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 permanent effects.

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Additional Example and Description of Programs for: "Using Asset Prices to Measure the Persistence of the Marginal Utility of Wealth"

This supplement contains an additional example that illustrates Proposition 4 in the paper. We also describe the programs and data used to derive the empirical results.

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Supplemental Material for "Using Asset Prices to Measure the Persistence of the Marginal Utility of Wealth"

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