Empirical Pricing Kernel and Option-Implied Risk Aversion in China 50 ETF

Hao-Chang Sung and Lisi Shi

Emerging Markets Finance and Trade, 2022, vol. 58, issue 15, 4286-4299

Abstract: Based on an analysis of the China 50 ETF options and their underlying assets, we measure the empirical pricing kernel and implied risk aversion. By employing a Markov-switching GARCH model, the estimated results show a monotonically decreasing pricing kernel under a high-volatility regime and a U-shaped pricing kernel under a low-volatility regime. The implied risk aversion is inversely S-shaped under both high- and low-volatility regimes. However, the implied risk aversion under the low-volatility regime has a wide range. Investors’ risk aversion perspective helps explain patterns of pricing kernels and risk aversion estimates. Finally, we find that implied risk aversion is predictive of short-term (excess) market returns based on in-sample and out-of-sample tests.

Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:mes:emfitr:v:58:y:2022:i:15:p:4286-4299

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DOI: 10.1080/1540496X.2022.2089559

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