The Pricing Kernel Puzzle in Forward Looking Data

33 Pages Posted: 7 Mar 2016 Last revised: 22 Aug 2016

See all articles by Horatio Cuesdeanu

Horatio Cuesdeanu

University of Konstanz - Department of Economics

Jens Carsten Jackwerth

University of Konstanz - Department of Economics

Date Written: August 19, 2016

Abstract

The pricing kernel puzzle concerns the locally increasing empirical pricing kernel, which is inconsistent with a risk-averse representative investor in a single period, single state variable setting. Some recent papers worry that the puzzle is caused simply by the mismatch of backward looking subjective and forward looking risk-neutral distributions of index returns. By using a novel test and forward looking information only, we generally confirm the existence of a u-shaped pricing kernel puzzle in the S&P 500 options data. The evidence is weaker for tests against an alternative with a risk-neutral investor and for longer horizons.

Keywords: Pricing Kernel, Option Pricing, Forward Looking Data

JEL Classification: G12, G13

Suggested Citation

Cuesdeanu, Horatio and Jackwerth, Jens Carsten, The Pricing Kernel Puzzle in Forward Looking Data (August 19, 2016). Available at SSRN: https://ssrn.com/abstract=2742225 or http://dx.doi.org/10.2139/ssrn.2742225

Horatio Cuesdeanu (Contact Author)

University of Konstanz - Department of Economics ( email )

Konstanz, D-78457
Germany

Jens Carsten Jackwerth

University of Konstanz - Department of Economics ( email )

Universitaetsstr. 10
Konstanz, 78457
Germany
+497531882196 (Phone)
+497531883120 (Fax)

HOME PAGE: http://cms.uni-konstanz.de/wiwi/jackwerth/

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
202
Abstract Views
1,087
rank
164,332
PlumX Metrics