Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
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TY - JOUR
T1 - Shape invariant modeling of pricing kernels and risk aversion
AU - Grith, Maria
AU - Haerdle, Wolfgang
AU - Park, Juhyun
PY - 2013
Y1 - 2013
N2 - Several empirical studies reported that pricing kernels exhibit a common pattern across different markets. The main interest in pricing kernels lies in validating the presence of the peaks and their variability in location among curves. Motivated by this observation we investigate the problem of estimating pricing kernels based on the shape invariant model, a semi-parametric approach used for multiple curves with shape-related nonlinear variation. This approach allows us to capture the common features contained in the shape of the functions and at the same time characterize the nonlinear variability with a few interpretable parameters. These parameters provide an informative summary of the curves and can be used to make a further analysis with macroeconomic variables. Implied risk aversion function and utility function can also be derived. The method is demonstrated with the European options and returns values of the German stock index DAX.
AB - Several empirical studies reported that pricing kernels exhibit a common pattern across different markets. The main interest in pricing kernels lies in validating the presence of the peaks and their variability in location among curves. Motivated by this observation we investigate the problem of estimating pricing kernels based on the shape invariant model, a semi-parametric approach used for multiple curves with shape-related nonlinear variation. This approach allows us to capture the common features contained in the shape of the functions and at the same time characterize the nonlinear variability with a few interpretable parameters. These parameters provide an informative summary of the curves and can be used to make a further analysis with macroeconomic variables. Implied risk aversion function and utility function can also be derived. The method is demonstrated with the European options and returns values of the German stock index DAX.
KW - pricing kernals
KW - risk aversion
KW - risk neutral density
U2 - 10.1093/jjfinec/nbs019
DO - 10.1093/jjfinec/nbs019
M3 - Journal article
VL - 11
SP - 370
EP - 399
JO - Journal of Financial Econometrics
JF - Journal of Financial Econometrics
SN - 1479-8417
IS - 2
ER -