On Pricing Kernels, Information and Risk

Investment Analysts Journal, Vol. 44, No. 1, pp 1-19, 2015

Posted: 16 Oct 2013 Last revised: 14 Feb 2015

See all articles by Diane Wilcox

Diane Wilcox

University of the Witwatersrand, School of Computational and Applied Mathematics

Tim Gebbie

University of Cape Town, Department of Statistical Sciences; University of the Witwatersrand, School of Computational and Applied Mathematics

Date Written: October 15, 2013

Abstract

We discuss the finding that cross-sectional characteristic based models have yielded portfolios with higher excess monthly returns but lower risk than their arbitrage pricing theory counterparts in an analysis of equity returns of stocks listed on the JSE. Under the assumption of general no-arbitrage conditions, we argue that evidence in favour of characteristic based pricing implies that information is more likely assimilated by means of nonlinear pricing kernels for the markets considered.

Keywords: Arbitrage pricing theory, characteristic based models, size effect, value effect, linear pricing kernel, nonlinear pricing kernel

JEL Classification: C10, C20, C21, C22, C30, C31, C32, G10, G12, G14, N10, N17

Suggested Citation

Wilcox, Diane and Gebbie, Timothy John, On Pricing Kernels, Information and Risk (October 15, 2013). Investment Analysts Journal, Vol. 44, No. 1, pp 1-19, 2015, Available at SSRN: https://ssrn.com/abstract=2340465 or http://dx.doi.org/10.2139/ssrn.2340465

Diane Wilcox (Contact Author)

University of the Witwatersrand, School of Computational and Applied Mathematics ( email )

1 Jan Smuts Avenue
Johannesburg, GA Gauteng 2000
South Africa

Timothy John Gebbie

University of Cape Town, Department of Statistical Sciences ( email )

PD Hahn Building (South Entrance)
Upper Campus
Cape Town, Western Cape 7701
South Africa

University of the Witwatersrand, School of Computational and Applied Mathematics ( email )

South Africa

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