Journal article
The Pricing Kernel Puzzle: A Real Phenomenon or a Statistical Artifact?
International Review of Finance, Vol.20(2), pp.485-491
2020
Abstract
A large literature finds evidence that the pricing kernels estimated from option prices and historical returns are not monotonically decreasing in market returns. We show that the inevitable coalescence of contingencies, especially in the left-tail, associated with estimating a distribution function may give rise to a nonmonotonic empirical pricing kernel even if the actual pricing kernel is monotonic. Hence, the observed nonmonotonicity of pricing kernels may be a statistical artifact rather than a real phenomenon. We argue that empirical work should explicitly correct for this effect by widening the option pricing bounds associated with monotonic pricing kernels.
Details
- Title
- The Pricing Kernel Puzzle: A Real Phenomenon or a Statistical Artifact?
- Authors
- Hammad Siddiqi (Corresponding Author) - University of the Sunshine Coast - Faculty of Arts, Business and LawSajid Anwar (Author) - University of the Sunshine Coast - Faculty of Arts, Business and Law
- Publication details
- International Review of Finance, Vol.20(2), pp.485-491
- Publisher
- Wiley-Blackwell Publishing Asia
- Date published
- 2020
- DOI
- 10.1111/irfi.12207
- ISSN
- 1369-412X
- Organisation Unit
- School of Business and Creative Industries; Indigenous and Transcultural Research Centre; University of the Sunshine Coast, Queensland; USC Business School - Legacy
- Language
- English
- Record Identifier
- 99451377402621
- Output Type
- Journal article
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- Business, Finance
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