The volatility implied by observed market prices as a function of the strike and time to maturity form an Implied Volatility Surface (IVS). Practical applications require reducing the dimension and characterize its dynamics through a small number of factors. Such dimension reduction is...

This paper analyzes empirical market utility functions and pricing kernels derived from the DAX and DAX option data for three market regimes. A consistent parametric framework of stochastic volatility is used. All empirical market utility functions show a region of risk proclivity that is...

Supported by several recent investigations the empirical pricing kernel paradox might be considered as a stylized fact. In Chabi-Yo 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....