Abstract

http://ssrn.com/abstract=1570390
 
 

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Returns of Claims on the Upside and the Viability of U-Shaped Pricing Kernels


Gurdip Bakshi


University of Maryland - Robert H. Smith School of Business

Dilip B. Madan


University of Maryland - Robert H. Smith School of Business

George Panayotov


Hong Kong University of Science & Technology

August 1, 2009

Journal of Financial Economics (JFE), Forthcoming

Abstract:     
When the pricing kernel is U-shaped, then expected returns of claims with payout on the upside are negative for strikes beyond a threshold, determined by the slope of the U-shaped kernel in its increasing region, and have negative partial derivative with respect to strike in the increasing region of the kernel. Using returns of (i) S&P 500 index calls, (ii) calls on major international equity indexes, (iii) digital calls, (iv) upside variance contracts, and (v) a theoretical construct that we denote as kernel call, we find broad support for the implications of U-shaped pricing kernels. A possible theoretical reconciliation of our empirical findings is explored through a model that accommodates heterogeneity in beliefs about return outcomes and short-selling.

Number of Pages in PDF File: 55

Keywords: U-shaped pricing kernels, claims on the upside, monotonically declining pricing kernels,

JEL Classification: G, G1, G11, G12, G13, C5, D24

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Date posted: March 19, 2010  

Suggested Citation

Bakshi, Gurdip and Madan, Dilip B. and Panayotov, George, Returns of Claims on the Upside and the Viability of U-Shaped Pricing Kernels (August 1, 2009). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: http://ssrn.com/abstract=1570390

Contact Information

Gurdip S. Bakshi (Contact Author)
University of Maryland - Robert H. Smith School of Business ( email )
Department of Finance
College Park, MD 20742-1815
United States
301-405-2261 (Phone)
301-314-9157 (Fax)
HOME PAGE: http://www.rhsmith.umd.edu/finance/gbakshi
Dilip B. Madan
University of Maryland - Robert H. Smith School of Business ( email )
College Park, MD 20742-1815
United States
301-405-2127 (Phone)
301-314-9157 (Fax)
George Panayotov
Hong Kong University of Science & Technology ( email )
Clearwater Bay
Kowloon
Hong Kong
852-2358-5049 (Phone)
852-2358-1749 (Fax)
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