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Reference dependent preferences and the EPK puzzle

Author

Listed:
  • Grith, Maria
  • Karl Härdle, Wolfgang
  • Krätschmer, Volker

Abstract

Supported by several recent investigations, the empirical pricing kernel (EPK) puzzle might be considered a stylized fact. Based on an economic model with state dependent preferences for the financial investors, we want to emphasize a microeconomic view that succeeds in explaining the puzzle. We retain the expected utility framework in a one period model and illustrate the case when the state is defined with respect to a reference point. We further investigate how the model relates the shape of the EPK to the economic conditions.

Suggested Citation

  • Grith, Maria & Karl Härdle, Wolfgang & Krätschmer, Volker, 2013. "Reference dependent preferences and the EPK puzzle," SFB 649 Discussion Papers 2013-023, Humboldt University Berlin, Collaborative Research Center 649: Economic Risk.
    • Handle: RePEc:zbw:sfb649:sfb649dp2013-023
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
    • 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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