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Generalized Recovery

Author

Listed:
  • Lasse Pedersen

    (Copenhagen Business School, New York Uni)

  • David Lando

    (Copenhagen Business School)

  • Christian Skov Jensen

    (Copenhagen Business School)

Abstract

We characterize when physical probabilities, marginal utilities, and the dis- count rate can be recovered from observed state prices for several future time periods. Our characterization makes no assumptions of the probability distribu- tion, thus generalizing the time-homogeneous stationary model of Ross (2015). Our characterization is simple and intuitive, linking recovery to the relation between the number of time periods and the number of states. When recovery is feasible, our model is easy to implement, allowing a closed-form linearized solution. We implement our model empirically, testing the predictive power of the recovered expected return and other recovered statistics.

Suggested Citation

  • Lasse Pedersen & David Lando & Christian Skov Jensen, 2016. "Generalized Recovery," 2016 Meeting Papers 935, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:935
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    References listed on IDEAS

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    Cited by:

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    2. Dillschneider, Yannick & Maurer, Raimond, 2019. "Functional Ross recovery: Theoretical results and empirical tests," Journal of Economic Dynamics and Control, Elsevier, vol. 108(C).
    3. Liu, Hong & Tang, Xiaoxiao & Zhou, Guofu, 2022. "Recovering the FOMC risk premium," Journal of Financial Economics, Elsevier, vol. 145(1), pages 45-68.
    4. Sirio Aramonte & Mohammad R. Jahan-Parvar & Samuel Rosen & John W. Schindler, 2022. "Firm-Specific Risk-Neutral Distributions with Options and CDS," Management Science, INFORMS, vol. 68(9), pages 7018-7033, September.
    5. Martin, Ian W. R. & Ross, Stephen A., 2019. "Notes on the yield curve," Journal of Financial Economics, Elsevier, vol. 134(3), pages 689-702.
    6. Kevin C. Smith & Eric C. So, 2022. "Measuring Risk Information," Journal of Accounting Research, Wiley Blackwell, vol. 60(2), pages 375-426, May.
    7. Jackwerth, Jens Carsten & Menner, Marco, 2020. "Does the Ross recovery theorem work empirically?," Journal of Financial Economics, Elsevier, vol. 137(3), pages 723-739.
    8. Akira Yamazaki, 2022. "Recovering subjective probability distributions," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(7), pages 1234-1263, July.

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    More about this item

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G1 - Financial Economics - - General Financial Markets
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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