Differential awareness and the pricing kernel puzzle

Siddiqi, Hammad and Quiggin, John (2016). Differential awareness and the pricing kernel puzzle. , .

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Author Siddiqi, Hammad
Quiggin, John
Title Differential awareness and the pricing kernel puzzle
Open Access Status File (Publisher version)
Publication date 2016-05-08
Total pages 29
Language eng
Formatted abstract
Risk-averse expected utility maximization implies that the pricing kernel must be a non-increasing function of aggregate wealth. However, empirical research has found that the pricing kernel frequently displays a locally increasing portion in aggregate wealth. This is known as the pricing kernel puzzle. In this article, we give conditions under which there exists a range of feasible option prices that produce a locally increasing pricing kernel similar to the empirically observed pricing kernel. We show by example that even small belief distortions may have a substantial impact on the shape of the pricing kernel when there is differential awareness
Keyword Bounded awareness
Differential awareness
Pricing kernel puzzle
Risk aversion
Stochastic discount factor
Institutional Status UQ

Document type: Working Paper
Collection: School of Economics Publications
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Created: Mon, 09 May 2016, 09:38:15 EST by Hammad Siddiqi on behalf of School of Economics