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


  • Fernando Alvarez,

    1. Dept. of Economics, University of Chicago, Chicago, IL 60637, U.S.A.; and NBER;
      Dept. of Finance, The Wharton School, University of Pennsylvania, 3620 Locust Walk, Philadelphia, PA 19104-6367, U.S.A.; and NBER;;
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  • Urban J. Jermann

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    • We thank Andy Atkeson, Erzo Luttmer, Lars Hansen, Pat Kehoe, Bob King, Narayana Kocherlakota, Stephen Leroy, Lee Ohanian, and the participants in workshops and conferences at UCLA, the University of Chicago, the Federal Reserve Banks of Minneapolis, Chicago, and Cleveland, and Duke, Boston, Ohio State, Georgetown, and Yale Universities, NYU, Wharton, the SED meeting in Stockholm, SITE, the Minnesota workshop in macroeconomic theory, and ESSFM for their comments and suggestions. We thank Robert Bliss for providing the data for U.S. zero-coupon bonds. Alvarez thanks the NSF and the Sloan Foundation for support. Earlier versions of this paper were circulated under the title “The Size of the Permanent Component of Asset Pricing Kernels.”


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.