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Horizon effects in the pricing kernel: How investors price short-term versus long-term risks
Driessen,Joost Koëter,Joren Wilms,Ole
Driessen,Joost
Koëter,Joren
Wilms,Ole
Abstract
We show that investors price short-term stock market outcomes very different from outcomes that occur further into the future. To this end, we introduce the expected forward pricing kernel and decompose long-term pricing kernels into short-term and expected forward pricing kernels. Using index options, we find that kernels with maturities of up to 12 months are U-shaped and show that this results from the shape of the 1-month pricing kernel. Once we remove the impact of the 1-month kernel, the expected forward kernels are in line with standard long-run risk models in terms of their shape, level, and time-series variation.
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Date
2025-12
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ssrn-3462415.pdf
Adobe PDF, 2.37 MB
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Keywords
asset pricing, pricing kernel, stochastic discount factor, pricing kernel puzzle, options, G12 - Asset Pricing ; Trading Volume ; Bond Interest Rates, G13 - Contingent Pricing ; Futures Pricing
Citation
Driessen, J, Koëter, J & Wilms, O 2025, 'Horizon effects in the pricing kernel: How investors price short-term versus long-term risks', Journal of Financial and Quantitative Analysis, vol. 60, no. 8, pp. 3791-3825. https://doi.org/10.1017/S0022109025000122
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info:eu-repo/semantics/openAccess