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  • Empirical pricing kernels
    Empirical pricing kernels
    Rosenberg, Joshua V.; Engle, Robert F.

    Journal of financial economics, 06/2002, Volume: 64, Issue: 3
    Journal Article

    This paper investigates the empirical characteristics of investor risk aversion over equity return states by estimating a time-varying pricing kernel, which we call the empirical pricing kernel (EPK). We estimate the EPK on a monthly basis from 1991 to 1995, using S&P 500 index option data and a stochastic volatility model for the S&P 500 return process. We find that the EPK exhibits counter cyclical risk aversion over S&P 500 return states. We also find that hedging performance is significantly improved when we use hedge ratios based the EPK rather than a time-invariant pricing kernel.

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