A statistical inquiry into the plausibility of recursive utility

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Abstract

We use purely statistical methods to determine if the pricing kernel is the intertemporal marginal rate of substitution under recursive utility. We introduce a nonparametric Bayesian method that treats the pricing kernel as a latent variable and extracts it and its transition density from payoffs on 24 Fama-French portfolios, on bonds, and on payoffs that use conditioning information available when portfolios are formed. Our priors are formed from an examination of a Bansal-Yaron economy. Using both monthly data and annual data, we find that the data support recursive utility.

Original languageEnglish (US)
Pages (from-to)523-559
Number of pages37
JournalJournal of Financial Econometrics
Volume5
Issue number4
DOIs
StatePublished - Dec 1 2007

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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