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Reference-Dependent Preferences and the Empirical Pricing Kernel Puzzle

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  • Maria Grith
  • Wolfgang K. Härdle
  • Volker Krätschmer

Abstract

Supported by several recent investigations, the empirical pricing kernel (PK) puzzle might be considered as a stylized fact. Based on an economic model with reference-dependent preferences for the financial investors, we emphasize a microeconomic view that explains the puzzle via state-dependent aggregate preferences. We also investigate how the shape of the PK estimated from option and stock market index returns changes in relation to the volatility risk premium.

Suggested Citation

  • Maria Grith & Wolfgang K. Härdle & Volker Krätschmer, 2017. "Reference-Dependent Preferences and the Empirical Pricing Kernel Puzzle," Review of Finance, European Finance Association, vol. 21(1), pages 269-298.
    • Handle: RePEc:oup:revfin:v:21:y:2017:i:1:p:269-298.
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    File URL: http://hdl.handle.net/10.1093/rof/rfv062
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    References listed on IDEAS

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    1. Brennan, Michael J., 1993. "Agency and Asset Pricing," University of California at Los Angeles, Anderson Graduate School of Management qt53k014sd, Anderson Graduate School of Management, UCLA.
    2. Luca Benzoni & Pierre Collin-Dufresne & Robert S. Goldstein, 2005. "Can Standard Preferences Explain the Prices of out of the Money S&P 500 Put Options," NBER Working Papers 11861, National Bureau of Economic Research, Inc.
    3. Shefrin, Hersh, 2008. "A Behavioral Approach to Asset Pricing," Elsevier Monographs, Elsevier, edition 2, number 9780123743565.
    4. Douglas T. Breeden & Michael R Gibbons & Robert H. Litzenberger, "undated". "Empirical Tests of the Consumption-Oriented CAPM," Rodney L. White Center for Financial Research Working Papers 07-89, Wharton School Rodney L. White Center for Financial Research.
    5. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    6. Alonso, Francisco & Blanco, Roberto & Rubio Irigoyen, Gonzalo, 2005. "Testing the Forecasting Performance of Ibex 35 Option-implied Risk-neutral Densities," DFAEII Working Papers 1988-088X, University of the Basque Country - Department of Foundations of Economic Analysis II.
    7. Breeden, Douglas T & Gibbons, Michael R & Litzenberger, Robert H, 1989. " Empirical Tests of the Consumption-Oriented CAPM," Journal of Finance, American Finance Association, vol. 44(2), pages 231-262, June.
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    9. Douglas T. Breeden & Michael R Gibbons & Robert H. Litzenberger, "undated". "Empirical Tests of the Consumption-Oriented CAPM," Rodney L. White Center for Financial Research Working Papers 7-89, Wharton School Rodney L. White Center for Financial Research.
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    Cited by:

    1. Barone-Adesi, Giovanni & Fusari, Nicola & Mira, Antonietta & Sala, Carlo, 2020. "Option market trading activity and the estimation of the pricing kernel: A Bayesian approach," Journal of Econometrics, Elsevier, vol. 216(2), pages 430-449.
    2. Ricardo Crisóstomo, 2021. "Estimating real‐world probabilities: A forward‐looking behavioral framework," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(11), pages 1797-1823, November.
    3. Chen Tong & Peter Reinhard Hansen & Zhuo Huang, 2022. "Option pricing with state‐dependent pricing kernel," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(8), pages 1409-1433, August.
    4. Jiao, Yuhan & Liu, Qiang & Guo, Shuxin, 2021. "Pricing kernel monotonicity and term structure: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 123(C).
    5. Peter Reinhard Hansen & Chen Tong, 2022. "Option Pricing with Time-Varying Volatility Risk Aversion," Papers 2204.06943, arXiv.org, revised Oct 2022.

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    More about this item

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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