A Non-Linear Market Model
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SeriesErasmus Econometric Institute Series
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SpeakersTobias Sichert (Stockholm School of Economics, Sweden)
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FieldEconometrics
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LocationErasmus University Rotterdam, E building, room ET-14
Rotterdam -
Date and time
May 02, 2024
12:00 - 13:00
Abstract
I show that non-linear pricing of market risk can explain many prominent cross-sectional stock return anomalies, such as momentum, betting-against-beta, idiosyncratic volatility, and liquidity.
The non-linear pricing model is inferred from options data without assumptions on the pricing relationship. I further document that many anomalies have a strong tail risk exposure, which is successfully priced by the model. A key feature of the model is a sizable upside risk premium of approximately 4% per annum. Finally, the pricing results can be explained with a compensation for exposure to systematic variance risk.