68 Pages Posted: 10 Aug 2015 Last revised: 6 Jun 2016
Date Written: November 16, 2015
Under mild assumptions, we recover the conditional moments of market returns from a model-free pricing kernel projection on tradeable realized moments that minimizes dispersion. Recovered moments predict realized moments and reveal the time-varying properties of horizon-dependent equity premia, variance risk premia and market Sharpe ratios. Projected kernels tend to be monotonic at short horizons and U-shaped at long horizons. They induce optimal trading strategies with counter-cyclical Sharpe ratios and plausible nonlinear market timing properties.
Keywords: Pricing Kernel, Model-Free, Projection, Risk Premia, Moments, Recovery Theorem, Trading Strategy
JEL Classification: C02, C23, C52, C61, G11, G12
Suggested Citation: Suggested Citation