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Brown bag seminar - Tobias Sichert, (SHoF/SSE), Volatility and the Pricing Kernel

Tobias Sichert, Swedish House of Finance at the Stockholm School of Economics

We show that, as a function of stock market returns, the pricing kernel becomes substantially flatter in times of high volatility. Losses are therefore less painful to investors in turbulent markets, including recessions, when they are more likely to occur. In contrast, asset pricing models based on habits long-run risks, time-varying disasters, and incomplete markets imply that the pricing kernel does not vary with volatility, or that it moves in the opposite direction. This implication results directly from the models' mechanisms for the equity premium, i.e. it cannot be altered without changing the models' basic economics.


Dept. of Finance

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