Pricing kernel monotonicity and term structure: Evidence from China

Using all the data of options on the China 50 ETF, we study the pricing kernel monotonicity by adapting the recently proposed conditional density integration approach of Linn-Shive-Shumway (LSS). Methodologically, we improve LSS on several useful aspects and make its procedures applicable universally. Empirically, we provide new supporting evidence for the monotonicity of pricing kernel from a Chinese portfolio. Equally important, we are the first to obtain monotonic pricing kernels over the whole range of returns. Finally, we initialize the study of the term structure of pricing kernel and report the results with one-, two-, four- and eight-week terms. Pricing kernels show little variation for less than one-month terms, but exhibit a higher curvature for eight weeks, implying higher aggregate risk for longer-term positive returns.