Abstract

http://ssrn.com/abstract=2383527
 


 



Pricing Kernel Monotonicity and Conditional Information


Matthew Linn


Isenberg School of Management, University of Massachusetts

Sophie Shive


University of Notre Dame - Department of Finance

Tyler Shumway


University of Michigan at Ann Arbor, The Stephen M. Ross School of Business

August 2, 2015


Abstract:     
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


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Date posted: January 24, 2014 ; Last revised: August 5, 2015

Suggested Citation

Linn, Matthew and Shive, Sophie and Shumway, Tyler, Pricing Kernel Monotonicity and Conditional Information (August 2, 2015). Available at SSRN: http://ssrn.com/abstract=2383527 or http://dx.doi.org/10.2139/ssrn.2383527

Contact Information

Matthew Linn
Isenberg School of Management, University of Massachusetts ( email )
Amherst, MA 01003
United States
Sophie Shive
University of Notre Dame - Department of Finance ( email )
P.O. Box 399
Notre Dame, IN 46556-0399
United States
Tyler Shumway (Contact Author)
University of Michigan at Ann Arbor, The Stephen M. Ross School of Business ( email )
701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-763-4129 (Phone)
734-936-0274 (Fax)
HOME PAGE: http://www.umich.edu/~shumway
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