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Escanciano, J. C., Hoderlein, S., Lewbel, A. and Linton, O.

Nonparametric Euler Equation Identification and Estimation

WP Number: 1517

Abstract: We consider nonparametric identification and estimation of pricing kernels, or equivalently of marginal utility functions up to scale, in consumption based asset pricing Euler equations.Ours is the first paper to prove nonparametric identification of Euler equations under low level conditions (without imposing functional restrictions or just assuming completeness). We also propose a novel nonparametric estimator based on our identification analysis, which combines standard kernel estimation with the computation of a matrix eigenvector problem. Our esti-mator avoids the ill-posed inverse issues associated with existing nonparametric instrumental variables based Euler equation estimators. We derive limiting distributions for our estimator and for relevant associated functionals. We provide a Monte Carlo analysis and an empirical application to US household-level consumption data.

Keywords: Euler equations, marginal utility, pricing kernel, Fredholm equations, integral equations, nonparametric identification, asset pricing

JEL Codes: C14 D91 E21 G12

Author links: Oliver Linton  

PDF: wp1517.pdf

Open Access Link: 10.17863/CAM.5784

Theme: empirical