Pricing Kernel Monotonicity and Conditional Information
Isenberg School of Management, University of Massachusetts; University of Michigan at Ann Arbor - Finance
University of Notre Dame - Department of Finance
University of Michigan at Ann Arbor, The Stephen M. Ross School of Business
August 2, 2015
A large literature finds evidence that pricing kernels estimated nonparametrically from option prices and historical returns are not monotonically decreasing in market index returns. We propose a new nonparametric estimator of the pricing kernel that reflects the information available to investors who set option prices. In simulations, the estimator outperforms current techniques. Our empirical estimates using S&P 500 index option data from 1996-2012 and FTSE 100 index option data from 2002-2013 suggest that the "pricing kernel puzzle'' is a byproduct of econometric technique rather than a behavioral or economic phenomenon.
Number of Pages in PDF File: 50
Date posted: January 24, 2014 ; Last revised: August 5, 2015
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