Pricing Kernels in International Markets: An Agnostic Study

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An agnostic method to estimate pricing kernels, that strictly depends only on asset returns proposed in Pukthuantong and Roll (2015), is extended to an international framework. Taking the method to the data, pricing kernels, using stock and bond prices denominated in local currency for China, the Eurozone, Japan, Russia, Switzerland, the United Kingdom, and the United States are evaluated. Tests are performed to give evidence of a common pricing kernel. Empirical results are consistent with complete markets for the time period that spans from January 1999 to September 2015. Furthermore, we shed light on additional international financial market issues. High interest rate currencies tend to have low pricing kernel volatilities and market data are consistent with low risk sharing indexes, allaying suspicions for the international risk sharing puzzle. A confidence interval for the international risk sharing index is evaluated, and verified with Monte Carlo simulations.

Author(s):

Tamara Nunes    
University of Lausanne
Switzerland