50 Pages Posted: 24 Jan 2014 Last revised: 5 Aug 2015
Date Written: 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.
Suggested Citation: Suggested Citation
Linn, Matthew and Shive, Sophie and Shumway, Tyler, Pricing Kernel Monotonicity and Conditional Information (August 2, 2015). Available at SSRN: https://ssrn.com/abstract=2383527 or http://dx.doi.org/10.2139/ssrn.2383527