The pricing kernel puzzle in forward looking data

Horatio Cuesdeanu () and Jens Carsten Jackwerth ()
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Horatio Cuesdeanu: University of Konstanz
Jens Carsten Jackwerth: University of Konstanz

Review of Derivatives Research, 2018, vol. 21, issue 3, No 1, 253-276

Abstract: Abstract The pricing kernel puzzle concerns the locally increasing empirical pricing kernel, which is inconsistent with a risk-averse representative investor in a single period, single state variable setting. Some recent papers worry that the puzzle is caused simply by the mismatch of backward looking subjective and forward looking risk-neutral distributions of index returns. By using a novel test and forward looking information only, we generally confirm the existence of a u-shaped pricing kernel puzzle in the S&P 500 options data. The evidence is weaker for tests against an alternative with a risk-neutral investor and for longer horizons.

Keywords: Pricing kernel; Option pricing; Forward looking data (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (11)

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DOI: 10.1007/s11147-017-9140-8

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