A generalized volatility bound for dynamic economies

Abstract

We develop a generalization of the Hansen–Jagannathan (1991) volatility bound that (i) incorporates the serial correlation properties of return data and (ii) allows us to calculate a spectral version of the bound. This generalization enables us to judge whether models match important aspects of the data in the long run, at business cycle frequencies, seasonal frequencies, etc. Our bound permits evaluation of models without requiring their explicit solution in a way that respects the dynamic implications of the fundamental component of the models, namely, the Euler equation that links asset returns to the intertemporal marginal rate of substitution.