Index option returns and generalized entropy bounds

Yan Liu

Journal of Financial Economics, 2021, vol. 139, issue 3, 1015-1036

Abstract: I develop a new spectrum of moment bounds on the pricing kernel. They stem from the solution of an optimization problem that is complementary to Hansen and Jagannathan (1991) approach. Economically, they measure the discrepancy between what an optimizing agent could achieve if all assets (that are priced by the pricing kernel) were tradable and what she can actually achieve in the real-world market. Through the lens of these bounds, I examine leading macro-finance models using index option returns. I show, in a model-free fashion, the difficulty of several classes of models in meeting option-implied bounds. I highlight the unique information that my bounds provide compared with existing approaches.

Keywords: Pricing kernel; Index options; High-order moments; Nonparametric bounds; Model diagnosis; Entropy; Model-free (search for similar items in EconPapers)
JEL-codes: C02 C58 G12 G13 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:139:y:2021:i:3:p:1015-1036

DOI: 10.1016/j.jfineco.2020.08.011

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