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Tobias Sichert (Johann Wolfgang Goethe-University Frankfurt am Main)

January 17 @ 12:00 - 13:15

 

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Date:
January 17
Time:
12:00 - 13:15
Event Category:
Academic Events

“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.