Economic Implications of Nonlinear Pricing Kernels

AFA 2009 San Francisco Meetings Paper

Management Science, vol 63, number 10, 2017

41 Pages Posted: 25 Mar 2008 Last revised: 1 Jun 2021

See all articles by Caio Almeida

Caio Almeida

Princeton University

René Garcia

Université de Montréal ; Toulouse School of Economics

Date Written: March 1, 2016

Abstract

Based on a family of discrepancy functions, we derive nonparametric stochastic discount factor (SDFs) bounds that naturally generalize variance (Hansen and Jagannathan, 1991), entropy (Backus, Chernov and Martin, 2011), and higher-moment (Snow, 1991) bounds. These bounds are especially useful to identify how parameters affect pricing kernel dispersion in asset pricing models. In particular, they allow us to distinguish between models where dispersion comes mainly from skewness from models where kurtosis is the primary source of dispersion. We analyze the admissibility of disaster, disappointment aversion and long-run risk models with respect to these bounds.

Keywords: Stochastic Discount Factor, Information-Theoretic Bounds, Generalized Minimum Contrast Estimators, Implicit Utility Maximizing Weights

JEL Classification: C1, C5, G1

Suggested Citation

Almeida, Caio and Garcia, René, Economic Implications of Nonlinear Pricing Kernels (March 1, 2016). AFA 2009 San Francisco Meetings Paper, Management Science, vol 63, number 10, 2017, Available at SSRN: https://ssrn.com/abstract=1107997 or http://dx.doi.org/10.2139/ssrn.1107997

Caio Almeida (Contact Author)

Princeton University ( email )

26 Prospect Avenue
Princeton, NJ 08540
United States

René Garcia

Université de Montréal ( email )

C.P. 6128, succursale Centre-Ville
3150, rue Jean-Brillant, bureau C-6027
Montreal, Quebec H3C 3J7
Canada
514-7018807 (Phone)

HOME PAGE: http://https://myrenegarcia.wordpress.com

Toulouse School of Economics ( email )

Toulouse
France

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