Supported by several recent investigations, the empirical pricing kernel (PK) puzzle might be considered as a stylized fact. Based on an economic model with reference-dependent preferences for the financial investors, we emphasize a microeconomic view that explains the puzzle via state-dependent aggregate preferences. We also investigate how the shape of the PK estimated from option and stock market index returns changes in relation to the volatility risk premium.

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ERIM Top-Core Articles
Review of Finance (Print)
Department of Econometrics

Grith, M., Härdle, W., & Krätschmer, V. (2016). Reference-Dependent Preferences and the Empirical Pricing Kernel Puzzle. Review of Finance (Print), 21(1), 269–298. doi:10.1093/rof/rfv062