Empirical Pricing Kernels and Investor Preferences

This paper analyzes empirical market utility functions and pricing kernelsderived from the DAX and DAX option data for three market regimes. Aconsistent parametric framework of stochastic volatility is used. All empiricalmarket utility functions show a region of risk proclivity that is reproduced byadopting the hypothesis of heterogeneous individual investors whose utilityfunctions have a switching point between bullish and bearish attitudes. Theinverse problem of finding the distribution of individual switching points isformulated in the space of stock returns by discretization as a quadratic optimization problem. The resulting distributions vary over time and correspondto different market regimes.