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Option Pricing Kernels and the ICAPM

Liu, Xiaoquan and Brennan, Michael and Xia, Yihong (2006) Option Pricing Kernels and the ICAPM. Working Paper. Working Paper Series.


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We estimate the parameters of pricing kernels that depend on both aggregate wealth and state variables that describe the investment opportunity set, using FTSE 100 and S&P 500 index option returns as the returns to be priced. The coefficients of the state variables are highly significant and remarkably consistent across specifications of the pricing kernel, and across the two markets. The results provide further evidence that, consistent with Merton's (1973) Intertemporal Capital Asset Pricing Model, state variables in addition to market risk are priced.

Item Type: Monograph (Working Paper)
Subjects: H Social Sciences > H Social Sciences (General)
Divisions: Faculty of Social Sciences > Essex Business School
Depositing User: Susan Hearsum
Date Deposited: 11 Sep 2014 09:05
Last Modified: 11 Sep 2014 09:05

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