Peter Reinhard Hansen, Chen Tong
arXiv 14 Apr 2022 · q-fin.PR · publishedReview of Financial Studies (2025) · 6 citations (OpenAlex)
arXiv:2204.06943 · PDF · DOI · OpenAlex · Extracted main text
We introduce a pricing kernel with time-varying volatility risk aversion to explain observed time variations in the shape of the pricing kernel. When combined with the Heston-Nandi GARCH model, this framework yields a tractable option pricing model in which the variance risk ratio (VRR) emerges as a key variable. We show that the VRR is closely linked to economic fundamentals, as well as sentiment and uncertainty measures. A novel approximation method provides analytical option pricing formulas, and we demonstrate substantial reductions in pricing errors through an empirical application to the S&P 500 index, the CBOE VIX, and option prices.
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The works this paper leans on most, across its whole bibliography — not restricted to papers in our corpus. Ranked by composite intensity, which combines how often a work is mentioned, how many sections mention it, and how much of that falls in the main text rather than the appendix.
| Reference | Intensity | Mentions | Sections | Main text | |
|---|---|---|---|---|---|
| 1 | Christoffersen, P., Heston, S. L., and Jacobs, K (2013) Capturing option anomalies with a variance-dependent pricing kernel | 1.000 | 22 | 5 | 100% |
| 2 | Heston, S. L. and Nandi, S (2000) A closed-form GARCH option valuation model | 0.969 | 11 | 4 | 91% |
| 3 | Bollerslev, T., Li, J., and Xue, Y (2018) Volume, volatility, and public news announcements | 0.737 | 3 | 2 | 100% |
| 4 | Carr, P. and Wu, L (2008) Variance Risk Premiums | 0.737 | 3 | 2 | 100% |
| 5 | Creal, D., Koopman, S. J., and Lucas, A (2013) Generalized autoregressive score models with applications | 0.737 | 3 | 2 | 100% |
| 6 | Grith, M., Härdle, W. K., and Krätschmer, V (2017) Reference-dependent preferences and the empirical pricing kernel puzzle | 0.737 | 3 | 2 | 100% |
| 7 | Welch, I. and Goyal, A (2007) A comprehensive look at the empirical performance of equity premium prediction | 0.644 | 4 | 1 | 100% |
| 8 | Baker, S. R., Bloom, N., and Davis, S. J (2016) Measuring economic policy uncertainty | 0.644 | 2 | 2 | 100% |
| 9 | Campbell, J. Y. and Cochrane, J. H (1999) By force of habit: A consumption-based explanation of aggregate stock market behavior | 0.644 | 2 | 2 | 100% |
| 10 | Christoffersen, P., Feunou, B., Jacobs, K., and Meddahi, N (2014) The economic value of realized volatility: Using high-frequency returns for option valuation | 0.644 | 2 | 2 | 100% |
Showing the top 10 of 71 scored citations.
arXiv econ.EM papers that cite this one, ranked by how heavily they lean on it.
| Citing paper | Intensity | Mentions | Sections | |
|---|---|---|---|---|
| 1 | Option Pricing with State-dependent Pricing Kernel | 0.405 | 1 | 1 |