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2005. “Using Asset Prices to Measure the Persistence of the Marginal Utility of Wealth.” Econometrica 73(6

By Fernando Alvarez, Di Tella and 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. [Keywords: Pricing kernel, stochastic discount factor, permanent component, unit roots

Year: 2013
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