A Statistical Inquiry into the Plausibility of Recursive Utility

We use purely statistical methods to determine if the pricingkernel is the intertemporal marginal rate of substitution underrecursive utility. We introduce a nonparametric Bayesian methodthat treats the pricing kernel as a latent variable and extractsit and its transition density from payoffs on 24 Fama-Frenchportfolios, on bonds, and on payoffs that use conditioning informationavailable when portfolios are formed. Our priors are formedfrom an examination of a Bansal-Yaron economy. Using both monthlydata and annual data, we find that the data support recursiveutility.     

Stock prices and volume

We undertake a comprehensive investigation of price and volumeco-movement using daily New York Stock Exchange data from 1928to 1987. We adjust the data to take into account well-knowncalendar effects and long-run trends. To describe the process,we use a seminonparametric estimate of the joint density ofcurrent price change and volume conditional on past price changesand volume. Four empirical regularities are found: (i) positivecorrelation between conditional volatility and volume; (ii)large price movements are followed by high volume; (iii) conditioningon lagged volume substantially attenuates the 'leverage' effect;.and (iv) after conditioning on lagged volume, there is a positiverisk-return relation.