Asset Pricing Puzzles: Evidence From Options Markets
- Topics:
- Investment and Capital Markets
- Tags:
- Asset,
- Pricing Strategy,
- Pricing Kernel,
- Pricing,
- Operational Planning,
- Marketing Research,
- Marketing,
- Business Operations,
- Asset Pricing,
- Asset Management,
- ...
- Source:
- Federal Reserve Bank of New York
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Overview: This paper proposes and implements a consumption-based pricing kernel (stochastic discount factor) testing methodology that focuses on the covariance between the pricing kernel and asset squared excess returns. This covariance has an intuitive economic interpretation as a risk-neutral variance risk-premium, i.e. the difference between the risk-neutral return variance and the objective return variance. In the same way that an asset risk-premium puzzle is due to a failure of the pricing kernel to adequately covary with asset excess returns, a risk-neutral variance puzzle is due to a failure of the pricing kernel to adequately covary with asset squared excess returns.
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Format: PDF | Size: 571KB | Date: Apr 2001 | Pages: 51
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