We propose a model of volatility tail behavior, in which the pricing measure dominates the physical measure in both tails of the volatility distribution and, hence, the derived pricing kernel exhibits an increasing and decreasing region in the volatility dimension. The model features investors...

When the pricing kernel is U-shaped, then expected returns of claims with payout on the upside are negative for strikes beyond a threshold, determined by the slope of the U-shaped kernel in its increasing region, and have negative partial derivative with respect to strike in the increasing...

When the pricing kernel is U-shaped, then expected returns of claims with payout on the upside are negative for strikes beyond a threshold, determined by the slope of the U-shaped kernel in its increasing region, and have negative partial derivative with respect to strike in the increasing...

We propose a model of volatility tail behavior, in which investors display aversion to both low volatility and high volatility states, and, hence, the derived pricing kernel exhibits an increasing and decreasing region in the volatility dimension. The model features investors who have...

Using data from January 18, 1996 to March 31, 2011, we construct and evaluate returns on a buy-write strategy on the Russell 2000 index. The results demonstrate that the strategy has consistently outperformed the Russell 2000 index on a risk adjusted basis, when implemented with one month to...

We contrast two different asset pricing models, where the pricing kernel either (i) increases in the volatility dimension, reflecting investors' aversion to volatility, or (ii) could be non-monotonic in volatility, reflecting heterogeneity in investors' beliefs. The two models yield opposite...