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The Size of the Permanent Component of Asset Pricing Kernels

Fernando Alvarez and Urban Jermann ()

No 8360, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We derive a lower bound for the size of the permanent component of 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 large; its volatility is about 100% of the volatility of the stochastic discount factor. This result implies that, if the pricing kernel is a function of consumption, innovations to consumption need to have permanent effects.

JEL-codes: G12 E43 (search for similar items in EconPapers)
Date: 2001-07
Note: AP EFG IFM
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