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Shape invariant modelling pricing kernels and risk aversion

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  • Maria Grith
  • Wolfgang Härdle
  • Juhyun Park

Abstract

Pricing kernels play a major role in quantifying risk aversion and investors' preferences. Several empirical studies reported that pricing kernels exhibit a common pattern across di erent markets. Mostly visual inspection and occasionally numerically summarise are used to make comparison. With increasing amount of information updated every day, the empirical pricing kernels can be viewed as an object evolving over time. We propose a systematic modelling approach to describing the evolution of the empirical pricing kernels. The approach is based on shape invariant models. It captures the common features contained in the shape of the functions and at the same time characterises the variability between the pricing kernels based on a few interpretable parameters. The method is demonstrated with the European options and returns values of DAX index.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2009-041.

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Length: 33 pages
Date of creation: Aug 2009
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2009-041

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Keywords: pricing kernels; risk aversion; risk neutral density;

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References

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  1. Karaman Örsal, Deniz Dilan & Droge, Bernd, 2014. "Panel cointegration testing in the presence of a time trend," Computational Statistics & Data Analysis, Elsevier, Elsevier, vol. 76(C), pages 377-390.
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  3. Tijmen R. Daniels & Henk Jager & Franc Klaassen, 2008. "Defending against Speculative Attacks," Tinbergen Institute Discussion Papers, Tinbergen Institute 08-090/2, Tinbergen Institute, revised 06 Apr 2009.
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  5. Guenther Filler & Martin Odening & Ostap Okhrin & Wei Xu, 2009. "On the Systemic Nature of Weather Risk," SFB 649 Discussion Papers, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany SFB649DP2009-002, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
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  13. Ji Cao & Wolfgang Härdle & Julius Mungo, 2009. "A Joint Analysis of the KOSPI 200 Option and ODAX Option Markets Dynamics," SFB 649 Discussion Papers, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany SFB649DP2009-019, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
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  16. Meller, Barbara & Nautz, Dieter, 2009. "The impact of the European Monetary Union on inflation persistence in the euro area," Discussion Papers, Free University Berlin, School of Business & Economics 2009/8, Free University Berlin, School of Business & Economics.
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  19. Katja Hanewald, 2009. "Mortality modeling: Lee-Carter and the macroeconomy," SFB 649 Discussion Papers, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany SFB649DP2009-008, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  20. Daniëls, Tijmen R. & Jager, Henk & Klaassen, Franc, 2011. "Currency crises with the threat of an interest rate defence," Journal of International Economics, Elsevier, Elsevier, vol. 85(1), pages 14-24, September.
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Citations

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Cited by:
  1. Audrino, Francesco & Meier, Pirmin, 2012. "Empirical pricing kernel estimation using a functional gradient descent algorithm based on splines," Economics Working Paper Series, University of St. Gallen, School of Economics and Political Science 1210, University of St. Gallen, School of Economics and Political Science.
  2. Wolfgang Karl Härdle & Yarema Okhrin & Weining Wang, 2010. "Uniform confidence bands for pricing kernels," SFB 649 Discussion Papers, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany SFB649DP2010-003, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  3. Fengler, Matthias & Hin, Lin-Yee, 2011. "Semi-nonparametric estimation of the call price surface under strike and time-to-expiry no-arbitrage constraints," Economics Working Paper Series, University of St. Gallen, School of Economics and Political Science 1136, University of St. Gallen, School of Economics and Political Science, revised May 2013.
  4. Maria Grith & Wolfgang Karl Härdle & Volker Krätschmer, 2013. "Reference Dependent Preferences and the EPK Puzzle," SFB 649 Discussion Papers, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany SFB649DP2013-023, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  5. Maria Grith & Wolfgang Karl Härdle & Melanie Schienle, 2010. "Nonparametric Estimation of Risk-Neutral Densities," SFB 649 Discussion Papers, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany SFB649DP2010-021, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.

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