Tobias Sichert (Johann Wolfgang Goethe-University Frankfurt am Main)
17 January 2020 @ 12:00 - 13:15
“The Pricing Kernel is U-shaped”
Abstract: Numerous studies find S-shaped pricing kernels, which is conflicting with standard theory. In contrast to that, based on a novel GARCH model with structural breaks, I show that the pricing kernel is consistently U-shaped. The results are robust to variations in the methodology and hold for several major international stock market indices. The new U-shaped pricing kernel estimates help to explain cross-sectional stock return anomalies. Furthermore, a pricing kernel mimicking trading strategy yields sizable Sharpe ratios. Finally, the empirical results can be explained well by a model with a variance-dependent pricing kernel, but only if structural breaks are included in the model.