Abstract
We estimate the pricing kernel from options on the S&P 500 index for different horizons and over time. This allows us to compare short-term and long-term pricing kernels and analyze their time-series variation. We show that the well documented pricing kernel puzzle–the non-monotonicity of the pricing kernel–only exists for short horizons. For longer horizons the puzzle disappears and the level, shape and time-series variation of the pricing kernel are in line with standard rational asset-pricing models. In contrast, we show that the empirical features of the short-term kernel can be explained by a behavioral asset-pricing model.
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