Reference dependent preferences and the EPK puzzle

Maria Grith, Wolfgang Karl Härdle and Volker Krätschmer

No 2013-023, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: Supported by several recent investigations, the empirical pricing kernel (EPK) puzzle might be considered a stylized fact. Based on an economic model with state dependent preferences for the financial investors, we want to emphasize a microeconomic view that succeeds in explaining the puzzle. We retain the expected utility framework in a one period model and illustrate the case when the state is defined with respect to a reference point. We further investigate how the model relates the shape of the EPK to the economic conditions.

Keywords: pricing kernel; aggregate agent; empirical pricing kernel; EPK puzzle; state dependent (search for similar items in EconPapers)
JEL-codes: C02 D04 D53 G13 (search for similar items in EconPapers)
Date: 2013
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