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Reference Dependent Preferences and the EPK Puzzle

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  • Maria Grith
  • Wolfgang Karl Härdle
  • Volker Krätschmer

Abstract

Supported by several recent investigations, the empirical pricing kernel (EPK) puzzle might be considered a stylized fact. Based on an economic model with state dependent preferences for the financial investors, we want to emphasize a microeconomic view that succeeds in explaining the puzzle. We retain the expected utility framework in a one period model and illustrate the case when the state is defined with respect to a reference point. We further investigate how the model relates the shape of the EPK to the economic conditions.

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Bibliographic Info

Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2013-023.

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Length: 37 pages
Date of creation: May 2013
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2013-023

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Keywords: Pricing kernel; aggregate agent; empirical pricing kernel; EPK puzzle; state dependent;

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