Pricing Kernels

Through the fullness of time, the winds of unification have blown over general asset pricing (say as represented by the CAPM and CCAPM) and over derivative asset pricing (say as represented by Black-Scholes and Harrison-Kreps). Out of these atmospheric stirrings has come the theory of pricing kernels.

Pricing kernels are not now at the heart of Statistics 956, but in due course they may become a big part. It depends on how the research shapes up, but even at this early moment, they offer some attractive advantages.

Getting Started

For the moment, I have just some unsorted links. I will add more comments and connections as the semester goes along. The first item is longish, but if you skip the bits that are not part of your experience set, you can still get to some very good stuff. It is a broad and professional review.

Rosenberg, J.V. and Engle, R.F. 2001. Empirical Pricing Kernels.

The second item is more focused on a specific question, but it also offers broad perspective.

Brown, D.P. and Jackwerth, J.C. 2002. The Pricing Kernel Puzzle: Reconciling Index Option Data and Economic Theory.

Both of these will have appeared by now, and eventually I will give a complete reference.

Not Getting Overwhelmed

The literature on pricing kernels is huge, and it continues to grow rapidly. Still, pricing kernels are ultimately a unifying concept, so, if you focus on the main themes, you actually get a pretty big bang for your studying buck.