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Pricing Kernel (pricing + kernel)

Distribution by Scientific Domains
Business, Economics, Finance and Accounting100%

Selected Abstracts

Efficiency, Equilibrium, and Asset Pricing with Risk of Default

ECONOMETRICA, Issue 4 2000
Fernando Alvarez
We introduce a new equilibrium concept and study its efficiency and asset pricing implications for the environment analyzed by Kehoe and Levine (1993) and Kocherlakota (1996). Our equilibrium concept has complete markets and endogenous solvency constraints. These solvency constraints prevent default at the cost of reducing risk sharing. We show versions of the welfare theorems. We characterize the preferences and endowments that lead to equilibria with incomplete risk sharing. We compare the resulting pricing kernel with the one for economies without participation constraints: interest rates are lower and risk premia depend on the covariance of the idiosyncratic and aggregate shocks. Additionally, we show that asset prices depend only on the valuation of agents with substantial idiosyncratic risk. [source]

Estimation of the consumption CAPM with imperfect sample separation information

INTERNATIONAL JOURNAL OF FINANCE & ECONOMICS, Issue 4 2008
Andrei Semenov
Abstract We propose a consumption-based capital asset pricing model consumption (CAPM), in which the pricing kernel is calculated as the average of individuals' intertemporal marginal rates of substitution weighted by the probabilities of holding the asset in question. These probabilities are conditional on available imperfect sample separation information and are estimated simultaneously with the parameters of Euler equations. Using data from the US Consumer Expenditure Survey, we find that the consumption CAPM with probability-weighted agents yields a more precise estimate of the agent's risk aversion compared with the model, in which the available imperfect information on asset-holding status is erroneously regarded as a perfect sample separation indicator. Copyright © 2007 John Wiley & Sons, Ltd. [source]

APPROXIMATING GARCH-JUMP MODELS, JUMP-DIFFUSION PROCESSES, AND OPTION PRICING

MATHEMATICAL FINANCE, Issue 1 2006
Jin-Chuan Duan
This paper considers the pricing of options when there are jumps in the pricing kernel and correlated jumps in asset prices and volatilities. We extend theory developed by Nelson (1990) and Duan (1997) by considering the limiting models for our approximating GARCH Jump process. Limiting cases of our processes consist of models where both asset price and local volatility follow jump diffusion processes with correlated jump sizes. Convergence of a few GARCH models to their continuous time limits is evaluated and the benefits of the models explored. [source]

THE DEPENDENCE STRUCTURE OF RUNNING MAXIMA AND MINIMA: RESULTS AND OPTION PRICING APPLICATIONS

MATHEMATICAL FINANCE, Issue 1 2010
Umberto Cherubini
We provide general results for the dependence structure of running maxima (minima) of sets of variables in a model based on (i) Markov dynamics; (ii) no Granger causality; (iii) cross-section dependence. At the time series level, we derive recursive formulas for running minima and maxima. These formulas enable to use a "bootstrapping" technique to recursively recover the pricing kernels of barrier options from those of the corresponding European options. We also show that the dependence formulas for running maxima (minima) are completely defined from the copula function representing dependence among levels at the terminal date. The result is applied to multivariate discrete barrier digital products. Barrier Altiplanos are simply priced by (i) bootstrapping the price of univariate barrier products; (ii) evaluating a European Altiplano with these values. [source]