Shape Invariant Modelling Pricing Kernels and Risk Aversion

SFB 649 Discussion Paper 2009-041

33 Pages Posted: 9 Jan 2017

See all articles by Maria Grith

Maria Grith

Erasmus University Rotterdam (EUR) - Erasmus School of Economics

Wolfgang Karl Härdle

Blockchain Research Center Humboldt-Universität zu Berlin; Charles University; National Yang Ming Chiao Tung University; Asian Competitiveness Institute

Juhyun Park

Lancaster University

Date Written: August 28, 2009

Abstract

Pricing kernels play a major role in quantifying risk aversion and investors' preferences. Several empirical studies reported that pricing kernels exhibit a common pattern across different markets. Mostly visual inspection and occasionally numerically summarise are used to make comparison. With increasing amount of information updated every day, the empirical pricing kernels can be viewed as an object evolving over time. We propose a systematic modelling approach to describing the evolution of the empirical pricing kernels. The approach is based on shape invariant models. It captures the common features contained in the shape of the functions and at the same time characterises the variability between the pricing kernels based on a few interpretable parameters. The method is demonstrated with the European options and returns values of DAX index.

Keywords: pricing kernels, risk aversion, risk neutral density

JEL Classification: C14, C32, G12

Suggested Citation

Grith, Maria and Härdle, Wolfgang Karl and Park, Juhyun, Shape Invariant Modelling Pricing Kernels and Risk Aversion (August 28, 2009). SFB 649 Discussion Paper 2009-041, Available at SSRN: https://ssrn.com/abstract=2894289 or http://dx.doi.org/10.2139/ssrn.2894289

Maria Grith

Erasmus University Rotterdam (EUR) - Erasmus School of Economics ( email )

Rotterdam
Netherlands

Wolfgang Karl Härdle (Contact Author)

Blockchain Research Center Humboldt-Universität zu Berlin ( email )

Unter den Linden 6
Berlin, D-10099
Germany

Charles University ( email )

Celetná 13
Dept Math Physics
Praha 1, 116 36
Czech Republic

National Yang Ming Chiao Tung University ( email )

No. 1001, Daxue Rd. East Dist.
Hsinchu City 300093
Taiwan

Asian Competitiveness Institute ( email )

Singapore

Juhyun Park

Lancaster University ( email )

Lancaster LA1 4YX
United Kingdom

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