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.

Additional Metadata
JEL Microeconomic Behavior: Underlying Principles (jel D01), Financial Markets (jel D53), Mathematical Methods (jel C02), Contingent Pricing; Futures Pricing (jel G13)
Persistent URL dx.doi.org/10.1093/rof/rfv062, hdl.handle.net/1765/112196
Series ERIM Top-Core Articles
Journal Review of Finance (Print)
Citation
Grith, M, Härdle, Wolfgang K., & Krätschmer, Volker. (2017). Reference-Dependent Preferences and the Empirical Pricing Kernel Puzzle. Review of Finance (Print), 21(1), 269–298. doi:10.1093/rof/rfv062