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Is the Price Kernel Monotone?


  • Giovanni BARONE-ADESI

    (University of Lugano and Swiss Finance Institute)

  • Hakim DALL'O

    (University of Lugano and Swiss Finance Institute)


We provide a new method to derive the state price density per unit probability based on option prices and GARCH model. We derive the risk neutral distribution using the result in Breeden and Litzenberger (1978) and the historical density adapting the GARCH model of Barone-Adesi, Engle, and Mancini (2008). We take the ratio of these two probabilities in order to describe the shape of the state price density and to evaluate its consistency with economic theory. We find that using a large dataset and introducing non-Gaussian innovations, the pricing kernel puzzle that arises in Jackwerth (2000) disappears both in a single day and over an average of different days with options expiring at the same maturity. We also evaluate the price kernel at the onset of the recent crisis.

Suggested Citation

  • Giovanni BARONE-ADESI & Hakim DALL'O, 2010. "Is the Price Kernel Monotone?," Swiss Finance Institute Research Paper Series 10-03, Swiss Finance Institute, revised Apr 2010.
  • Handle: RePEc:chf:rpseri:rp1003

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    Cited by:

    1. Beare, Brendan K., 2011. "Measure preserving derivatives and the pricing kernel puzzle," Journal of Mathematical Economics, Elsevier, vol. 47(6), pages 689-697.
    2. Brendan K. Beare & Lawrence D. W. Schmidt, 2016. "An Empirical Test of Pricing Kernel Monotonicity," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 31(2), pages 338-356, March.

    More about this item


    Pricing kernel; State price density per unit probability; Risk neutral; Historical distribution;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading


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