An Empirical Investigation of Asset Pricing With Temporally Dependent Preference
An Empirical Investigation of Asset Pricing With Temporally Dependent Preference
John Eaton
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1) as: (4. 2) q(t) = £{mrs(t+4)y(t+4) !£(t)} where mrs(t+4) = (3 [muc( t+4)/muc( t ) ] . Hansen and Jagannathan (1990, 1991) (hereafter H-J) show how to use observed asset prices and payoffs to estimate regions in which the mean and standard deviation for the process, mrs, must lie. They show that given a mean for the marginal rate of substitution, it is possible to estimate a lower bound for the standard deviation of the marginal rate of substitution. By changing the hypothetical mean for the ...marginal rate of substitution, a 12 region for the moments of the marginal rate of substitution is created . After creating this region, H-J propose to test different models by asking whether the moments of the marginal rate of substitution predicted by the model lie within the region. This is the diagnostic I use. In estimating the H-J region, I used the one month treasury bill return and the monthly CRSP value weighted return constructed from daily returns (from 1962, 7 to 1989, 12) 13 . These two returns were multiplied by their 19 lagged values to create 6 asset payoffs and prices to use in estimating the region.
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