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Empirical Pricing Kernels: Evidence from the Hong Kong Stock Market

Author

Listed:
  • Xinyu WU

    (School of Finance, Anhui University of Finance and Economics, China)

  • Senchun REN

    (School of Finance, Anhui University of Finance and Economics, China)

  • Hailin ZHOU

    (School of Finance, Anhui University of Finance and Economics, China)

Abstract

In this paper, we investigate the empirical pricing kernels for the Hong Kong stock market. We deal with semiparametric estimation of the empirical pricing kernel as the ratio of the objective and risk-neutral densities, under a consistent parametric framework of the non-affine GARCH diffusion model. An efficient importance sampling (EIS)-based joint maximum likelihood estimation method is developed for the objective and risk-neutral densities, using the Hang Seng Index (HSI) and index warrants data. Empirical results show that there exists a reference point and around this reference point the empirical pricing kernel exhibits a hump. The market utility function does not correspond to standard specification of utility function in the classical expected utility theory, but exhibits a convex form below the reference point and a concave form above it, and the investors act risk seeking around the reference point.

Suggested Citation

  • Xinyu WU & Senchun REN & Hailin ZHOU, 2017. "Empirical Pricing Kernels: Evidence from the Hong Kong Stock Market," ECONOMIC COMPUTATION AND ECONOMIC CYBERNETICS STUDIES AND RESEARCH, Faculty of Economic Cybernetics, Statistics and Informatics, vol. 51(4), pages 263-278.
    • Handle: RePEc:cys:ecocyb:v:50:y:2017:i:4:p:263-278
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    References listed on IDEAS

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    More about this item

    Keywords

    pricing kernel; utility function; risk aversion; GARCH diffusion model; maximum likelihood estimation.;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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