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Option Pricing Kernels and the ICAPM

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  • Brennan, Michael J
  • LIU, XIAOQUAN
  • Xia, Yihong
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    Abstract

    We estimate the parameters of pricing kernels that depend on both aggregate wealth and state variables that describe the investment opportunity set, using FTSE 100 and S&P 500 index option returns as the returns to be priced. The coefficients of the state variables are highly significant and remarkably consistent across specifications of the pricing kernal, and across the two markets. The results provided further strong evidence, which is consistent with Merton's (1973a) Intertemporal Capital Asset Pricing Model, that state variables in addition to market risk are priced.

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    Bibliographic Info

    Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number qt4d90p8ss.

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    Date of creation: 29 Jun 2005
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    Handle: RePEc:cdl:anderf:qt4d90p8ss

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    Keywords: option pricing;

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