Volatility and the Pricing Kernel

44 Pages Posted: 30 Nov 2021 Last revised: 20 Aug 2022

See all articles by David Schreindorfer

David Schreindorfer

Arizona State University

Tobias Sichert

Stockholm School of Economics; Swedish House of Finance

Date Written: August 19, 2022


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, popular asset pricing theories imply that the pricing of stock market risk does not vary with volatility, or that it moves in the opposite direction. Our finding suggests that stock market volatility evolves largely independently from the pricing kernel. We embed this assumption into a consumption-based model with a disappointment averse investor. The model captures the dynamics of the pricing kernel and resolves four recent puzzles about stock market risk premia.

Keywords: Pricing kernel, volatility, equity index options, tail risk, recovery, habits, long-run risks, rare disasters, incomplete markets

JEL Classification: G12, G13, G33

Suggested Citation

Schreindorfer, David and Sichert, Tobias and Sichert, Tobias, Volatility and the Pricing Kernel (August 19, 2022). 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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