EMPIRICAL PRICING KERNELS: EVIDENCE FROM THE HONG KONG STOCK MARKET

In this paper, we investigate the empirical pricing kernels for the Hong Kong stock market. We deal with semiparametric estimation of the empirical pricing kernel as the ratio of the objective and risk-neutral densities, under a consistent parametric framework of the non-affine GARCH diffusion model. An efficient importance sampling (EIS)-based joint maximum likelihood estimation method is developed for the objective and risk-neutral densities, using the Hang Seng Index (HSI) and index warrants data. Empirical results show that there exists a reference point and around this reference point the empirical pricing kernel exhibits a hump. The market utility function does not correspond to standard specification of utility function in the classical expected utility theory, hut exhibits a convex form below the reference point and a concave form above it, and the investors act risk seeking around the reference point.