Does the Pricing Kernel Anomaly Reflect Forward Looking Beliefs?

Carlo Sala
Additional contact information
Carlo Sala: Swiss Finance Institute at the University of Lugano

No 15-66, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Estimating the market's subjective distribution of future returns by means of backward looking historical data leads to uninformative and, at best, partially-conditional measures. What is missing are the investors' forward looking beliefs. This long-lasting problem affects a huge amount of literature and leads to puzzles and suboptimal results. I propose a new flexible and highly informative non-parametric method to estimate a fully-conditional and time varying physical measure. Letting the data speak as much as possible I complete the measure through the informational content of the implied moments of the option prices. The proposed density, a mixture of different sources of information, combines the options forward-looking knowledges with the historical background provided by stock returns thus encoding past, present and future information.The new measure is then used to investigate extensively the pricing kernel monotonicity.

Pages: 51 pages
Date: 2015-11, Revised 2016-02
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://ssrn.com/abstract=2720180 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1566

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().