IDEAS home Printed from https://ideas.repec.org/a/oup/revfin/v21y2017i1p269-298..html
   My bibliography  Save this article

Reference-Dependent Preferences and the Empirical Pricing Kernel Puzzle

Author

Listed:
  • Maria Grith
  • Wolfgang K. Härdle
  • Volker Krätschmer

Abstract

Supported by several recent investigations, the empirical pricing kernel (PK) puzzle might be considered as a stylized fact. Based on an economic model with reference-dependent preferences for the financial investors, we emphasize a microeconomic view that explains the puzzle via state-dependent aggregate preferences. We also investigate how the shape of the PK estimated from option and stock market index returns changes in relation to the volatility risk premium.

Suggested Citation

  • Maria Grith & Wolfgang K. Härdle & Volker Krätschmer, 2017. "Reference-Dependent Preferences and the Empirical Pricing Kernel Puzzle," Review of Finance, European Finance Association, vol. 21(1), pages 269-298.
    • Handle: RePEc:oup:revfin:v:21:y:2017:i:1:p:269-298.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/rof/rfv062
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Douglas T. Breeden & Michael R Gibbons & Robert H. Litzenberger, "undated". "Empirical Tests of the Consumption-Oriented CAPM," Rodney L. White Center for Financial Research Working Papers 07-89, Wharton School Rodney L. White Center for Financial Research.
    2. repec:bla:jfinan:v:44:y:1989:i:2:p:231-62 is not listed on IDEAS
    3. Luca Benzoni & Pierre Collin-Dufresne & Robert S. Goldstein, 2005. "Can Standard Preferences Explain the Prices of out of the Money S&P 500 Put Options," NBER Working Papers 11861, National Bureau of Economic Research, Inc.
    4. repec:dau:papers:123456789/13604 is not listed on IDEAS
    5. Brennan, Michael J., 1993. "Agency and Asset Pricing," University of California at Los Angeles, Anderson Graduate School of Management qt53k014sd, Anderson Graduate School of Management, UCLA.
    6. Shefrin, Hersh, 2008. "A Behavioral Approach to Asset Pricing," Elsevier Monographs, Elsevier, edition 2, number 9780123743565.
    7. Mas-Colell, Andreu & Whinston, Michael D. & Green, Jerry R., 1995. "Microeconomic Theory," OUP Catalogue, Oxford University Press, number 9780195102680.
    8. Francisco Alonso & Roberto Blanco & Gonzalo Rubio, 2005. "Testing the forecasting performace of IBEX 35 option implied risk neutral densities," Working Papers 0504, Banco de España.
    9. Douglas T. Breeden & Michael R Gibbons & Robert H. Litzenberger, "undated". "Empirical Tests of the Consumption-Oriented CAPM," Rodney L. White Center for Financial Research Working Papers 7-89, Wharton School Rodney L. White Center for Financial Research.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Barone-Adesi, Giovanni & Fusari, Nicola & Mira, Antonietta & Sala, Carlo, 2020. "Option market trading activity and the estimation of the pricing kernel: A Bayesian approach," Journal of Econometrics, Elsevier, vol. 216(2), pages 430-449.
    2. Ricardo Crisóstomo, 2021. "Estimating real‐world probabilities: A forward‐looking behavioral framework," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(11), pages 1797-1823, November.
    3. Chen Tong & Peter Reinhard Hansen & Zhuo Huang, 2022. "Option pricing with state‐dependent pricing kernel," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(8), pages 1409-1433, August.
    4. Jiao, Yuhan & Liu, Qiang & Guo, Shuxin, 2021. "Pricing kernel monotonicity and term structure: Evidence from China," Journal of Banking & Finance, Elsevier, vol. 123(C).
    5. Peter Reinhard Hansen & Chen Tong, 2022. "Option Pricing with Time-Varying Volatility Risk Aversion," Papers 2204.06943, arXiv.org, revised Aug 2024.
    6. Tong, Chen, 2024. "Pricing CBOE VIX in non-affine GARCH models with variance risk premium," Finance Research Letters, Elsevier, vol. 62(PA).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:hum:wpaper:sfb649dp2013-023 is not listed on IDEAS
    2. Dou, Winston Wei & Ji, Yan & Wu, Wei, 2021. "Competition, profitability, and discount rates," Journal of Financial Economics, Elsevier, vol. 140(2), pages 582-620.
    3. 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.
    4. van den Goorbergh, R.W.J., 2004. "Essays on optimal hedging and investment strategies and on derivative pricing," Other publications TiSEM 4b4b16af-8621-463f-bbfa-0, Tilburg University, School of Economics and Management.
    5. David A. Volkman, 1999. "Market Volatility And Perverse Timing Performance Of Mutual Fund Managers," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 22(4), pages 449-470, December.
    6. Li, Yuming, 1998. "Expected stock returns, risk premiums and volatilities of economic factors1," Journal of Empirical Finance, Elsevier, vol. 5(2), pages 69-97, June.
    7. Yacine Ait-Sahalia & Jonathan A. Parker & Motohiro Yogo, 2001. "Luxury Goods and the Equity Premium," NBER Working Papers 8417, National Bureau of Economic Research, Inc.
    8. repec:dau:papers:123456789/56 is not listed on IDEAS
    9. Magdalena Mikolajek-Gocejna, 2021. "Estimation, Instability, and Non-Stationarity of Beta Coefficients for Twenty-four Emerging Markets in 2005-2021," European Research Studies Journal, European Research Studies Journal, vol. 0(4), pages 370-395.
    10. Robert F. Whitelaw, 1997. "Time-Varying Sharpe Ratios and Market Timing," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-074, New York University, Leonard N. Stern School of Business-.
    11. Ravi Jagannathan & Srikant Marakani & Hitoshi Takehara & Yong Wang, 2012. "Calendar Cycles, Infrequent Decisions, and the Cross Section of Stock Returns," Management Science, INFORMS, vol. 58(3), pages 507-522, March.
    12. Anindya Biswas & Biswajit Mandal, 2016. "Estimating Preference Parameters From Stock Returns Using Simulated Method Of Moments," Annals of Financial Economics (AFE), World Scientific Publishing Co. Pte. Ltd., vol. 11(01), pages 1-13, March.
    13. Lamont, Owen A., 2001. "Economic tracking portfolios," Journal of Econometrics, Elsevier, vol. 105(1), pages 161-184, November.
    14. Yuming Li & Ko Wang, 1995. "The Predictability of REIT Returns and Market Segmentatio," Journal of Real Estate Research, American Real Estate Society, vol. 10(4), pages 471-482.
    15. Ioannis D Vrontos & Loukia Meligkotsidou & Spyridon D Vrontos, 2011. "Performance evaluation of mutual fund investments: The impact of non-normality and time-varying volatility," Journal of Asset Management, Palgrave Macmillan, vol. 12(4), pages 292-307, September.
    16. Ashley Lim & Yihui Lan & Sirimon Treepongkaruna, 2020. "Asset pricing and energy consumption risk," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3813-3850, December.
    17. He, Ying & Dyer, James S. & Butler, John C. & Jia, Jianmin, 2019. "An additive model of decision making under risk and ambiguity," Journal of Mathematical Economics, Elsevier, vol. 85(C), pages 78-92.
    18. Martin Lettau & Sydney Ludvigson, 2001. "Resurrecting the (C)CAPM: A Cross-Sectional Test When Risk Premia Are Time-Varying," Journal of Political Economy, University of Chicago Press, vol. 109(6), pages 1238-1287, December.
    19. Gerard Hoberg & S. Katie Moon, 2019. "The Offshoring Return Premium," Management Science, INFORMS, vol. 67(6), pages 2876-2899, June.
    20. Stuart Hyde & Mohamed Sherif, 2004. "Don't break the habit: structural stability tests of consumption models in the UK," Money Macro and Finance (MMF) Research Group Conference 2003 49, Money Macro and Finance Research Group.
    21. Clarke, Charles, 2022. "The level, slope, and curve factor model for stocks," Journal of Financial Economics, Elsevier, vol. 143(1), pages 159-187.
    22. Tim A. Kroencke, 2017. "Asset Pricing without Garbage," Journal of Finance, American Finance Association, vol. 72(1), pages 47-98, February.

    More about this item

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • 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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:revfin:v:21:y:2017:i:1:p:269-298.. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/eufaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.