Does Regime Switching in Pricing Kernel Help Explain Changes in Risk Behavior?
Wolfgang K. Härdle1,2, Maria Grith1
1Ladislaus von Bortkiewicz Chair of Statistics, Humboldt-Universität zu Berlin, Berlin, Germany; 2Center for Applied Statistics and Economics, Berlin; 3Berlin

The empirical pricing kernel paradox can be reconciled with the standard economic theory on asset pricing by allowing for state dependent utilities in a model with heterogeneous financial investors. Theoretically, the change behaviour is compressed by the pricing kernels pertaining to different regimes and the “switching points” between regimes. These measures have an intrinsic economic interpretation and their evolution over time reveal important insights on changes in risk taking behaviour of investors. We develop and investigate a methodology that allows us to solve an inverse problem in terms of data fits of 'basic' pricing kernels. The method is demonstrated with the European options and returns values of DAX index. We analyse the daily estimates in a dynamic framework, in relation with macro economic variables of interests.


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Keywords: Pricing kernel; Regime switching; Risk perception; Dynamic structure

Biography: Maria Grith pursued a Bachelor in International Economic Relations at the Western University Timisoara, Faculty of Economics. Between 2005 and 2008 she attended the Master's Program in Economics and Management Science (M.Sc.) at Humboldt-Universitt zu Berlin with majors in Economics and Statistics. From 2006 she worked as student assistant in the Institute of Economic Policy II, WIWI HU Berlin. In April 2008 she started her Ph.D. at the Institute of Statistics, HU, by Prof. Wolfgang Härdle. She was teaching assistant for the courses Statistics I, Statistics II and lecturer of Statistics of Financial Markets and Multivariate Statistical Analysis at HU, as well as TA for Applied Economic Analysis at Hertie School of Governance. Her topic “Dynamics of Risk Attitudes” lies at the boundary between modern nonparametric statistics, financial mathematics and economics.

Research interests: Microstructure of Financial Market, Empirical Pricing Kernels, Behavioural Economics, Functional Data Analysis, Sequential Monte CarloMethods