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M.J. Brennan, X. Liu, Y. Xia, “Option Pricing Kernels and the ICAPM,” University of California eScholarship Repository (29 June 2005).

M.J. Brennan, X. Liu, Y. Xia, “Option Pricing Kernels and the ICAPM,” University of California eScholarship Repository (29 June 2005).

Abstract
We estimate the parameters of pricing kernels that depend on both aggregate wealth and state variables that describe the investment opportunity set, using FTSE 100 and S&P 500 index option returns as the returns to be priced. The coefficients of the state variables are highly significant and remarkably consistent across specifications of the pricing kernel, and across the two markets. The results provide further evidence that, consistent with Merton’s (1973) Intertemporal Capital Asset Pricing Model, state variables in addition to market risk The failure of simple complete markets option pricing models of the Black-Scholes (1973) type points to the importance in option pricing of state variables other than the underlying asset price. Despite increasing evidence that state variables other than the market index are important for pricing both.