NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Size of the Permanent Component of Asset Pricing Kernels

Fernando Alvarez, Urban J. Jermann

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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Document Object Identifier (DOI): 10.3386/w8360

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