## Nonlinear Pricing Kernels, Kurtosis Preference, and the Cross-Section of Assets Returns (2002)

Venue: | Journal of Finance |

Citations: | 82 - 2 self |

### BibTeX

@ARTICLE{Dittmar02nonlinearpricing,

author = {Robert F. Dittmar},

title = {Nonlinear Pricing Kernels, Kurtosis Preference, and the Cross-Section of Assets Returns},

journal = {Journal of Finance},

year = {2002},

pages = {369--403}

}

### Years of Citing Articles

### OpenURL

### Abstract

This paper investigates nonlinear pricing kernels in which the risk factor is endogenously determined and preferences restrict the definition of the pricing kernel. These kernels potentially generate the empirical performance of nonlinear and multifactor models, while maintaining empirical power and avoiding ad hoc specifications of factors or functional form. Our test results indicate that preferencerestricted nonlinear pricing kernels are both admissible for the cross section of returns and are able to significantly improve upon linear single- and multifactor kernels. Further, the nonlinearities in the pricing kernel drive out the importance of the factors in the linear multi-factor model. A PRINCIPAL IMPLICATION OF THE Capital Asset Pricing Model ~CAPM! is that the pricing kernel is linear in a single factor, the portfolio of aggregate wealth. Numerous studies over the past two decades have documented violations of this restriction. 1 In response, researchers have examined the performance of alternative models of asset prices. These models have generally fallen into two classes: ~1! multifactor models such as Ross ’ APT or Merton’s ICAPM, in which factors in addition to the market return determine asset prices; or ~2! nonparametric models, such as Bansal et al. ~1993!, Bansal and Viswanathan ~1993!, and Chapman ~1997!, in which the pricing kernel is not