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
Date Written: October 15, 2013
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
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