Behavioral in the Short-run and Rational in the Long-run? Evidence from S&P 500 Options

53 Pages Posted: 17 Oct 2019

See all articles by Joost Driessen

Joost Driessen

Tilburg University - Center and Faculty of Economics and Business Administration; Tilburg University - Center for Economic Research (CentER)

Joren Koëter

Department of Finance; Tilburg University - Center for Economic Research (CentER)

Ole Wilms

Tilburg School of Economics and Management

Date Written: October 1, 2019

Abstract

We estimate the pricing kernel from options on the S&P 500 index for different horizons and over time. This allows us to compare short- and long-term pricing kernels and analyze their time-series variation. We show that the well documented pricing kernel puzzle — that is, the non-monotonicity of the pricing kernel — only exists for short horizons. For longer horizons the puzzle disappears and the level, shape and time-series variation of the pricing kernel are in line with standard rational expectation asset pricing models. Furthermore, we show that the empirical features of the short-term kernel can be explained by a behavioral asset pricing model.

Keywords: asset pricing, pricing kernel, stochastic discount factor, pricing kernel puzzle, options

JEL Classification: G10, G12, G13

Suggested Citation

Driessen, Joost and Koëter, Joren and Wilms, Ole, Behavioral in the Short-run and Rational in the Long-run? Evidence from S&P 500 Options (October 1, 2019). Available at SSRN: https://ssrn.com/abstract=3462415 or http://dx.doi.org/10.2139/ssrn.3462415

Joost Driessen

Tilburg University - Center and Faculty of Economics and Business Administration ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Joren Koëter (Contact Author)

Department of Finance; Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, DC 5000 LE
Netherlands

Ole Wilms

Tilburg School of Economics and Management ( email )

PO Box 90153
Tilburg, 5000 LE Ti
Netherlands

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