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Pricing kernel monotonicity and term structure: Evidence from China

Author

Listed:
  • Jiao, Yuhan
  • Liu, Qiang
  • Guo, Shuxin

Abstract

Using all the data of options on the China 50 ETF, we study the pricing kernel monotonicity by adapting the recently proposed conditional density integration approach of Linn-Shive-Shumway (LSS). Methodologically, we improve LSS on several useful aspects and make its procedures applicable universally. Empirically, we provide new supporting evidence for the monotonicity of pricing kernel from a Chinese portfolio. Equally important, we are the first to obtain monotonic pricing kernels over the whole range of returns. Finally, we initialize the study of the term structure of pricing kernel and report the results with one-, two-, four- and eight-week terms. Pricing kernels show little variation for less than one-month terms, but exhibit a higher curvature for eight weeks, implying higher aggregate risk for longer-term positive returns.

Suggested Citation

  • Jiao, Yuhan & Liu, Qiang & Guo, Shuxin, 2021. "Pricing kernel monotonicity and term structure: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 123(C).
    • Handle: RePEc:eee:jbfina:v:123:y:2021:i:c:s0378426620302983
    DOI: 10.1016/j.jbankfin.2020.106037
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    References listed on IDEAS

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    More about this item

    Keywords

    Pricing kernel monotonicity; Pricing kernel term structure; Options on the China 50 ETF; Conditional density integration; Standardized pricing kernel estimation;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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