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Conditioning Information and Variance Bounds on Pricing Kernels with Higher- Order Moments: Theory and Evidence

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  • Fousseni Chabi-Yo

Abstract

We develop a strategy for utilizing higher moments, variance risk premia, and conditioning information efficiently, and hence improve on the variance bounds computed by Hansen and Jagannathan (1991); Gallant, Hansen, and Tauchen (1990); and Bekaert and Liu (2004). Our bounds reach existing bounds when nonlinearities in returns are not priced. We also use higher moments, variance risk premia, and conditioning information to provide distance measures that improve on the Hansen and Jagannathan (1997) distance measure. Empirical results indicate that when accounting for the impact of higher moments and variance risk premia, the existing pricing kernels have difficulty in explaining returns on the assets and derivatives. The Author 2007. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.

Suggested Citation

  • Fousseni Chabi-Yo, 2008. "Conditioning Information and Variance Bounds on Pricing Kernels with Higher- Order Moments: Theory and Evidence," Review of Financial Studies, Society for Financial Studies, vol. 21(1), pages 181-231, January.
  • Handle: RePEc:oup:rfinst:v:21:y:2008:i:1:p:181-231
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    File URL: http://hdl.handle.net/10.1093/rfs/hhm053
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    Cited by:

    1. Peñaranda, Francisco & Sentana, Enrique, 2016. "Duality in mean-variance frontiers with conditioning information," Journal of Empirical Finance, Elsevier, vol. 38(PB), pages 762-785.
    2. Peter Christoffersen & Mathieu Fournier & Kris Jacobs & Mehdi Karoui, 2015. "Option-Based Estimation of the Price of Co-Skewness and Co-Kurtosis Risk," CREATES Research Papers 2015-54, Department of Economics and Business Economics, Aarhus University.
    3. Feunou, Bruno & Jahan-Parvar, Mohammad & Okou, Cedric, 2015. "Downside Variance Risk Premium," Finance and Economics Discussion Series 2015-20, Board of Governors of the Federal Reserve System (U.S.).
    4. repec:kap:rqfnac:v:50:y:2018:i:1:d:10.1007_s11156-017-0627-z is not listed on IDEAS
    5. repec:eee:ecosys:v:41:y:2017:i:1:p:151-162 is not listed on IDEAS
    6. Chang, Bo Young & Christoffersen, Peter & Jacobs, Kris, 2013. "Market skewness risk and the cross section of stock returns," Journal of Financial Economics, Elsevier, vol. 107(1), pages 46-68.
    7. Belén Nieto & Alfonso Novales Cinca & Gonzalo Rubio, 2011. "Variance Swaps and Intertemporal Asset Pricing," Documentos de Trabajo del ICAE 2011-08, Universidad Complutense de Madrid, Facultad de Ciencias Económicas y Empresariales, Instituto Complutense de Análisis Económico.

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