A microeconomic explanation of the epk paradox

Abstract

Supported by some recent investigations the empirical pricing kernel paradox might be viewed as a stylized fact. In ChabiYo et al. (2008) simulation studies have been presented which suggest that this paradox might be caused by regime switching of stock prices in financial markets. Alternatively, we want to emphasize a microeconomic view. Based on an economic model with state dependent utilities for the financial investors we succeed in explaining the paradox by changes of risk attitudes. Theoretically, the change behaviour is compressed in the pricing kernels. As a starting point for empirical insights we shall develop and investigate inverse problems in terms of data fits for estimated basic values of the pricing kernel.