Estimating the expected marginal rate of substitution
Subtitle: exploiting idiosyncratic risk
By: Robert P. Flood, Andrew K. Rose.
Contributors: Rose, Andrew, 1959-; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 10805; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 10805.
Publisher: National Bureau of Economic Research
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Stocks -- Rate of return -- Mathematical models.; Stocks -- Prices -- Mathematical models.; Risk -- Mathematical models.
Description: "This paper develops a simple but general methodology to estimate the expected intertemporal marginal rate of substitution or "EMRS", using only data on asset prices and returns.  Our empirical strategy is general, and allows the EMRS to vary arbitrarily over time.  A novel feature of our technique is that it relies upon exploiting idiosyncratic risk, since theory dictates that idiosyncratic shocks earn the EMRS.  We apply our methodology to two different data sets: monthly data from 1994 through 2003, and daily data for 2003.  Both data sets include assets from three different markets: the New York Stock Exchange, the NASDAQ, and the Toronto Stock Exchange.  For both monthly and daily frequencies, we find plausible estimates of EMRS with considerable precision and time-series volatility.  We then use these estimates to test for asset integration, both within and between stock markets.  We find that all three markets seem to be internally integrated in the sense that different assets traded on a given market share the same EMRS.  The technique is also powerful enough to reject integration between the three stock markets, and between stock and money markets"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
Title from PDF file as viewed on 1/10/2005.
Also available in print.
System requirements: Adobe Acrobat Reader.
Mode of access: World Wide Web.