Existing literature continues to be unable to offer a convincing explanation for the volatility of the stochastic discount factor in real world data. Our work provides such an explanation. We do not rely on frictions, market incompleteness or transactions costs of any kind. Instead, we modify a...

We introduce aggregate uncertainty and complete markets into Blanchard's (1985) perpetual youth model. We show how to construct a simple formula for the pricing kernel in terms of observable aggregate variables. We study a pure trade version of our model and we show it behaves much like the...