Volatility and the Pricing Kernel

46 Pages Posted: 30 Nov 2021 Last revised: 25 Oct 2023

See all articles by David Schreindorfer

David Schreindorfer

Arizona State University

Tobias Sichert

Stockholm School of Economics; Swedish House of Finance

Date Written: October 23, 2023


We use options and return data to show that negative stock market returns are significantly more painful to investors when they occur in periods of low volatility. In contrast, asset pricing theories based on habits and long-run risks imply that the pricing of stock market risk does not vary with volatility, or that it moves in the opposite direction. An explanation of our finding that is consistent with prior empirical evidence and the time-varying disaster risk model of Gabaix (2012) is that volatility evolves independently of the pricing kernel.

Keywords: Pricing kernel, volatility, state prices, equity index options, tail risk, risk-return trade-off, conditional density estimation, habits, long-run risks, rare disasters, valuation risk

JEL Classification: G12, G13, G33

Suggested Citation

Schreindorfer, David and Sichert, Tobias and Sichert, Tobias, Volatility and the Pricing Kernel (October 23, 2023). Swedish House of Finance Research Paper No. 21-22, Available at SSRN: https://ssrn.com/abstract=3970180 or http://dx.doi.org/10.2139/ssrn.3970180

David Schreindorfer (Contact Author)

Arizona State University ( email )

United States

HOME PAGE: http://www.davidschreindorfer.com

Tobias Sichert

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383

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