IDEAS home Printed from https://ideas.repec.org/a/oup/rfinst/v31y2018i2p532-555..html
   My bibliography  Save this article

A Recovery that We Can Trust? Deducing and Testing the Restrictions of the Recovery Theorem

Author

Listed:
  • Gurdip Bakshi
  • Fousseni Chabi-Yo
  • Xiaohui Gao

Abstract

How reliable is the recovery theorem of Ross (2015)? We explore this question in the context of options on the 30-year Treasury bond futures, allowing us to deduce restrictions that link the physical and risk-neutral return distributions. Our empirical results undermine the implications of the recovery theorem. First, we reject an implicit assumption of the recovery theorem that the martingale component of the stochastic discount factor is identical to unity. Second, we consider the restrictions between the physical and risk-neutral return moments when the recovery theorem holds, and reject them in both forecasting regressions and generalized method of moments estimations. Received November 7, 2016; editorial decision July 24, 2017 by Editor Stijn Van Nieuwerburgh. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Suggested Citation

  • Gurdip Bakshi & Fousseni Chabi-Yo & Xiaohui Gao, 2018. "A Recovery that We Can Trust? Deducing and Testing the Restrictions of the Recovery Theorem," The Review of Financial Studies, Society for Financial Studies, vol. 31(2), pages 532-555.
  • Handle: RePEc:oup:rfinst:v:31:y:2018:i:2:p:532-555.
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1093/rfs/hhx108
    Download Restriction: Access to full text is restricted to subscribers.
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Martin, Ian W. R. & Ross, Stephen A., 2019. "Notes on the yield curve," Journal of Financial Economics, Elsevier, vol. 134(3), pages 689-702.
    2. Dilip B. Madan & Wim Schoutens & King Wang, 2020. "Bilateral multiple gamma returns: Their risks and rewards," International Journal of Financial Engineering (IJFE), World Scientific Publishing Co. Pte. Ltd., vol. 7(01), pages 1-27, March.
    3. Dillschneider, Yannick & Maurer, Raimond, 2019. "Functional Ross recovery: Theoretical results and empirical tests," Journal of Economic Dynamics and Control, Elsevier, vol. 108(C).
    4. Shinmi Ahn & Hyungbin Park, 2020. "Examining the Feasibility of the Sturm–Liouville Theory for Ross Recovery," Mathematics, MDPI, vol. 8(4), pages 1-16, April.
    5. Jackwerth, Jens Carsten & Menner, Marco, 2020. "Does the Ross recovery theorem work empirically?," Journal of Financial Economics, Elsevier, vol. 137(3), pages 723-739.
    6. Likuan Qin & Vadim Linetsky, 2018. "Long-term factorization in Heath–Jarrow–Morton models," Finance and Stochastics, Springer, vol. 22(3), pages 621-641, July.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:oup:rfinst:v:31:y:2018:i:2:p:532-555.. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Oxford University Press (email available below). General contact details of provider: https://edirc.repec.org/data/sfsssea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.