The empirical pricing kernels estimated from index options are non-monotone (Rosenberg and Engle, 2002; Bakshi, Madan, and Panayotov, 2010) and the corresponding risk aversion functions can be negative (Ait-Sahalia and Lo, 2000; and Jackwerth, 2000). We show theoretically that these and several other...

Actively managed mutual funds have distinct return distributions from their passive benchmarks and our theoretical analysis using tail-sensitive risk preferences suggests that active value and growth funds may serve to reduce downside risk and capture upside potential, respectively. Furthermore,...