Economic Implications of Nonlinear Pricing Kernels

41 Pages Posted: 25 Mar 2008 Last revised: 21 Dec 2016

Caio Almeida

Getulio Vargas Foundation

René Garcia

Université de Montréal - CIREQ - Département de sciences économiques; University of Montreal

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. Available at SSRN: https://ssrn.com/abstract=1107997 or http://dx.doi.org/10.2139/ssrn.1107997

Caio Almeida (Contact Author)

Getulio Vargas Foundation ( email )

Praia de Botafogo 190, 11o andar
Botafogo
Rio de Janeiro, Rio de Janeiro 22250-900
Brazil
5521-37995827 (Phone)
5521-2553-8821 (Fax)

HOME PAGE: http://www.fgv.br/professor/calmeida/

René Garcia

Université de Montréal - CIREQ - Département de sciences économiques ( email )

C.P. 6128, succursale Centre-Ville
3150, rue Jean-Brillant, bureau C-6027
Montreal, Quebec H3C 3J7
Canada
514-985-4014 (Phone)

University of Montreal ( email )

United States

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