Empirical pricing kernels and investor preferences

Kai Detlefsen, Wolfgang Härdle and Rouslan A. Moro

No 2007-017, SFB 649 Discussion Papers from Humboldt University Berlin, Collaborative Research Center 649: Economic Risk

Abstract: This paper analyzes empirical market utility functions and pricing kernels derived from the DAX and DAX option data for three market regimes. A consistent parametric framework of stochastic volatility is used. All empirical market utility functions show a region of risk proclivity that is reproduced by adopting the hypothesis of heterogeneous individual investors whose utility functions have a switching point between bullish and bearish attitudes. The inverse problem of finding the distribution of individual switching points is formulated in the space of stock returns by discretization as a quadratic optimization problem. The resulting distributions vary over time and correspond to different market regimes.

Keywords: Utility function; pricing kernel; behvioral finance; risl aversion; risk proclivity; Heston model (search for similar items in EconPapers)
JEL-codes: C50 G12 G13 (search for similar items in EconPapers)
Date: 2007
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