Reference-Dependent Preferences and the Empirical Pricing Kernel Puzzle

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.

Publication
Review of Finance, 2017: 21 (1), 269-298
Date
Links