A Microeconomic Explanation of the EPK Paradox
AbstractSupported by several recent investigations the empirical pricing kernel paradox might be considered as a stylized fact. In Chabi-Yo et al. (2008) simulation studies have been presented which suggest that this paradox might be caused by regime switching of stock prices in financial markets. Alternatively, we want to emphasize a microeconomic view. Based on an economic model with state dependent utilities for the financial investors we succeed in explaining the paradox by changes of the risk attitudes. Theoretically, the change behaviour is compressed by the pricing kernels. As a starting point for empirical insights we shall develop and investigate inverse problems in terms of data fits for estimated basic values of the pricing kernel.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2009-010.
Length: 30 pages
Date of creation: Feb 2009
Date of revision:
Pricing kernel; representative agent; empirical pricing kernel; epk paradox; state dependent utilities; switching points;
Find related papers by JEL classification:
- D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
- D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
- C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-04-18 (All new papers)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- George M. Constantinides & Jens Carsten Jackwerth & Stylianos Perrakis, 2009.
"Mispricing of S&P 500 Index Options,"
Review of Financial Studies,
Society for Financial Studies, vol. 22(3), pages 1247-1277, March.
- Jens Carsten Jackwerth & George M. Constantinaides & Stylianos Perrakis, 2005. "Mispricing of S&P 500 Index Options," CoFE Discussion Paper 05-09, Center of Finance and Econometrics, University of Konstanz.
- Stylianos Perrakis & Jens Carsten Jackwerth & George Constantinides, 2005. "Mispricing of S&P 500 Index Options," Working Papers wp05-07, Warwick Business School, Finance Group.
- George M. Constantinides & Jens Carsten Jackwerth & Stylianos Perrakis, 2008. "Mispricing of S&P 500 Index Options," NBER Working Papers 14544, National Bureau of Economic Research, Inc.
- Jackwerth, Jens Carsten, 2000.
"Recovering Risk Aversion from Option Prices and Realized Returns,"
Review of Financial Studies,
Society for Financial Studies, vol. 13(2), pages 433-51.
- Jens Carsten Jackwerth., 1996. "Recovering Risk Aversion from Option Prices and Realized Returns," Research Program in Finance Working Papers RPF-265, University of California at Berkeley.
- Jens Carsten Jackwerth, 1998. "Recovering Risk Aversion from Option Prices and Realized Returns," Finance 9803002, EconWPA.
- Karni, Edi & Schmeidler, David & Vind, Karl, 1983. "On State Dependent Preferences and Subjective Probabilities," Econometrica, Econometric Society, vol. 51(4), pages 1021-31, July.
- Fousseni Chabi-Yo & René Garcia & Eric Renault, 2008. "State Dependence Can Explain the Risk Aversion Puzzle," Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 973-1011, April.
- Yuri Golubev & Wolfgang Härdle & Roman Timonfeev, 2008. "Testing Monotonicity of Pricing Kernels," SFB 649 Discussion Papers SFB649DP2008-001, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- Kai Detlefsen & Wolfgang Härdle & Rouslan Moro, 2007. "Empirical Pricing Kernels and Investor Preferences," SFB 649 Discussion Papers SFB649DP2007-017, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
- Jeanblanc, Monique & Dana, Rose-Anne, 2003. "Financial Markets in Continuous Time," Economics Papers from University Paris Dauphine 123456789/13604, Paris Dauphine University.
- Yacine Ait-Sahalia & Andrew W. Lo, 2000.
"Nonparametric Risk Management and Implied Risk Aversion,"
NBER Working Papers
6130, National Bureau of Economic Research, Inc.
- Ait-Sahalia, Yacine & Lo, Andrew W., 2000. "Nonparametric risk management and implied risk aversion," Journal of Econometrics, Elsevier, vol. 94(1-2), pages 9-51.
- Beare, Brendan K. & Schmidt, Lawrence, 2011. "An Empirical Test of Pricing Kernel Monotonicity," University of California at San Diego, Economics Working Paper Series qt5572n8pc, Department of Economics, UC San Diego.
- Beare, Brendan K., 2011. "Measure preserving derivatives and the pricing kernel puzzle," Journal of Mathematical Economics, Elsevier, vol. 47(6), pages 689-697.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (RDC-Team).
If references are entirely missing, you can add them using this form.