Asset pricing puzzles: Evidence from options markets

This paper examines the relationship between consumption-based and option-based risk-neutral moments, providing a technique to explore consumption-based pricing kernel specifications using data from the options markets. Estimators for average risk-neutral moments of each type are proposed and implemented. Option-based average risk-neutral moments are estimated for S&P500 returns using S&P500 futures options data; consumption-based moments are estimated using aggregate consumption data, the time-series of S&P500 returns, and pricing kernels characterized by constant relative risk aversion, consumption durability, and habit persistence. Moment comparisons indicate that there is a " risk-neutral standard deviation puzzle. " All of the pricing kernel specifications, even at very high levels of relative risk aversion, significantly underestimate option-based risk-neutral standard deviation or interquartile range.