The Size of the Permanent Component of Asset Pricing Kernels
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NBER Working Paper No. 8360
Issued in July 2001
NBER Program(s): AP EFG IFM
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.
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