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Implications of Security Market Data for Models of Dynamic Economies

Lars Peter Hansen and Ravi Jagannathan
Journal of Political Economy
Vol. 99, No. 2 (Apr., 1991), pp. 225-262
Stable URL: http://www.jstor.org/stable/2937680
Page Count: 38
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Implications of Security Market Data for Models of Dynamic Economies
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Abstract

We show how to use security market data to restrict the admissible region for means and standard deviations of intertemporal marginal rates of substitution (IMRSs) of consumers. Our approach (i) is nonparametric and applies to a rich class of models of dynamic economies, (ii) characterizes the duality between the mean--standard deviation frontier for IMRSs and the familiear mean- standard deviation frontier for asset returns, and (iii) exploits the restriction that IMRSs are positive random variables. The region provides a convenient summary of the sense in which asset market data are anaomalous from the vantage point of intertemporal asset pricing theory.

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