Behavioral in the Short-run and Rational in the Long-run? Evidence from S&P 500 Options
53 Pages Posted: 17 Oct 2019
Date Written: October 1, 2019
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: Suggested Citation