Horizon Effects in the Pricing Kernel: How Investors Price Short-Term Versus Long-Term Risks
Year: 2025
Type: article
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.
Authors: Joost Driessen, Joren Koëter, Ole Wilms
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $3,550
OpenAlex ID: W4408459636