Implications of Security Market Data for Models of Dynamic Economies
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NBER Technical Working Paper No. 89
Issued in May 1990
NBER Program(s): EFG
We show how to use security market data to restrict the admissible region for means and standard deviations of intertemporal marginal rates of substitution (IMRS's) of consumers. Our approach is (i) nonparametric and applies to a rich class of models of dynamic economies; (ii) characterizes the duality between the mean-standard deviation frontier for IMRS's and the familiar mean-standard deviation frontier for asset returns; and (iii) exploits the restriction that IMRS's are positive random variables. The region provides a convenient summary of the sense in which asset market data are anomalous from the vantage point of intertemporal asset pricing theory.
Published: Journal of Political Economy, Vol. 99, No. 2, pp. 225-262, (1991).
This paper first appeared as NBER working paper w3479, Recursive Linear Models of Dynamic Economies, Lars Peter Hansen, Thomas J. Sargent
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