NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Testing Volatility Restrictions on Intertemporal Marginal Rates of Substitution Implied by Euler Equations and Asset Returns

Stephen G. Cecchetti, Pok-sang Lam, Nelson C. Mark

NBER Technical Working Paper No. 124
Issued in July 1992
NBER Program(s):   AP

The Euler equations derived from a broad range of intertemporal asset pricing models, together with the first two unconditional moments of asset returns, imply a lower bound on the volatility of the intertemporal marginal rate of substitution. We develop and implement statistical tests of these lower bound restrictions. We conclude that the availability of relatively short time series of consumption data undermines the ability of tests that use the restrictions implied by the volatility bound to discriminate among different utility functions.

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Document Object Identifier (DOI): 10.3386/t0124

Published: Journal of Finance, Vol. 70, February 1994, pp. 80-102.

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