Implications of Security Market Data for Models of Dynamic Economies

Abstract

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