Publication Type

Journal Article

Version

publishedVersion

Publication Date

1-2016

Abstract

Using both S&P 500 option and recently introduced VIX option prices, we study pricing kernels and their dependence on multiple volatility factors. We first propose nonparametric estimates of marginal pricing kernels, conditional on the VIX and the slope of the variance swap term structure. Our estimates highlight the state-dependence nature of the pricing kernels. In particular, conditioning on volatility factors, the pricing kernel of market returns exhibit a downward sloping shape up to the extreme end of the right tail. Moreover, the volatility pricing kernel features a striking U-shape, implying that investors have high marginal utility in both high and low volatility states. This finding on the volatility pricing kernel presents a new empirical challenge to both existing equilibrium and reduced-form asset pricing models of volatility risk. Finally, using a full-fledged parametric model, we recover the joint pricing kernel, which is not otherwise identifiable.

Keywords

multi-factor volatility model, pricing kernel, variance swaps, VIX options

Discipline

Econometrics | Finance

Research Areas

Finance

Areas of Excellence

Growth in Asia

Publication

Journal of Econometrics

Volume

190

Issue

1

First Page

176

Last Page

196

ISSN

0304-4076

Identifier

10.1016/j.jeconom.2015.06.024

Publisher

Elsevier

External URL

https://api.elsevier.com/content/abstract/scopus_id/84947998131

Additional URL

https://doi.org/10.1016/j.jeconom.2015.06.024

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