Theoretical Relation between Expected Option Returns and Pricing Kernel

11 Pages Posted: 28 Sep 2022

See all articles by Akira Yamazaki

Akira Yamazaki

Hosei University - Graduate School of Business Administration

Date Written: September 19, 2022

Abstract

This research is aimed at examining the theoretical relations between expected option returns and a pricing kernel. Under mild assumptions, it is demonstrated that the condition of the tail of the pricing kernel slope characterizes the slope and curvature of the expected option returns. This study also determines the threshold levels of the pricing kernel for each case in which the expected call returns are negative or the expected put returns exceed the risk-free rate, thereby violating the classical asset pricing theory. The results of this study are more comprehensive and informative than those of previous works.

Suggested Citation

Yamazaki, Akira, Theoretical Relation between Expected Option Returns and Pricing Kernel (September 19, 2022). Available at SSRN: https://ssrn.com/abstract=4222691 or http://dx.doi.org/10.2139/ssrn.4222691

Akira Yamazaki (Contact Author)

Hosei University - Graduate School of Business Administration ( email )

Japan

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