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Nonparametric Euler equation identification and estimation

Authors: Juan Carlos Escanciano , Stefan Hoderlein , Arthur Lewbel , Oliver Linton and Sorawoot Srisuma
Date: 01 October 2015
Type: cemmap Working Paper, CWP61/15
DOI: 10.1920/wp.cem.2015.6115

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 estimator 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.

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