Speaker：Professor Wolfgang Karl Härdle
Topic：Pricing kernels are often non-monotone
Speaker：Professor Wolfgang Karl Härdle
Blockchain Research Center Humboldt-Universität zu Berlin; Charles University; National Yang Ming Chiao Tung University; Asian Competitiveness Institute; Academy of Economic Studies, Bucharest
Date Time：Fri. Nov 22, 2024, 10:40-11:30
Place： 4F-427, Assembly Building I
Abstract
The "pricing kernel puzzle", which challenges finance principles, has attracted attention in nonparametric pricing kernel estimation. Linn et al. (2018) developed forward-looking estimators with B-spline smoothing to produce theoretically consistent, monotonically decreasing kernels. However, our findings show equivalence between B-spline and kernel smoothing methods based on the identical risk-neutral densities calculating based on their method and traditional ones. We further find that the new method fails to get monotonic pricing kernel when volatility jumps happen or in crypto options market. Our findings suggest that behavioral or economic factors, rather than estimation flaws, may drive the puzzle.