1. Pricing Kernel Monotonicity and Conditional Information
- Author
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Sophie Shive, Tyler Shumway, and Matthew Linn
- Subjects
Economics and Econometrics ,050208 finance ,Nonparametric estimator ,Index (economics) ,05 social sciences ,Estimator ,Monotonic function ,01 natural sciences ,Stock market index ,Behavioral or ,Microeconomics ,Set (abstract data type) ,010104 statistics & probability ,Stochastic discount factor ,Accounting ,0502 economics and business ,Economics ,Econometrics ,Finite difference methods for option pricing ,Rational pricing ,0101 mathematics ,Finance ,Mathematics - Abstract
A large literature finds evidence that pricing kernels estimated nonparametrically from option prices and historical returns are not monotonically decreasing in market index returns. We propose a new nonparametric estimator of the pricing kernel that reflects the information available to investors who set option prices. In simulations, the estimator outperforms current techniques. Our empirical estimates using S&P 500 index option data from 1996-2012 and FTSE 100 index option data from 2002-2013 suggest that the "pricing kernel puzzle'' is a byproduct of econometric technique rather than a behavioral or economic phenomenon.
- Published
- 2017
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