Generalized Recovery

Publikation: Working paperForskning

Resumé

We characterize when physical probabilities, marginal utilities, and the discount rate can be recovered from observed state prices for several future time periods. We make no assumptions of the probability distribution, thus generalizing the time-homogeneous stationary model of Ross (2015). Recovery is feasible when the number of maturities with observable prices is higher than the number of states of the economy (or the number of parameters characterizing the pricing kernel). 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.
We characterize when physical probabilities, marginal utilities, and the discount rate can be recovered from observed state prices for several future time periods. We make no assumptions of the probability distribution, thus generalizing the time-homogeneous stationary model of Ross (2015). Recovery is feasible when the number of maturities with observable prices is higher than the number of states of the economy (or the number of parameters characterizing the pricing kernel). 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.
SprogEngelsk
Udgivelses stedwww
UdgiverSSRN: Social Science Research Network
Antal sider63
StatusUdgivet - 2017

Emneord

  • Asset pricing theory
  • Financial economics
  • Pricing kernel
  • Risk aversion

Citer dette

Jensen, C. S., Lando, D., & Pedersen, L. H. (2017). Generalized Recovery. www: SSRN: Social Science Research Network.
Jensen, Christian Skov ; Lando, David ; Pedersen, Lasse Heje. / Generalized Recovery. www : SSRN: Social Science Research Network, 2017.
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abstract = "We characterize when physical probabilities, marginal utilities, and the discount rate can be recovered from observed state prices for several future time periods. We make no assumptions of the probability distribution, thus generalizing the time-homogeneous stationary model of Ross (2015). Recovery is feasible when the number of maturities with observable prices is higher than the number of states of the economy (or the number of parameters characterizing the pricing kernel). 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.",
keywords = "Asset pricing theory, Financial economics, Pricing kernel, Risk aversion, Asset pricing theory, Financial economics, Pricing kernel, Risk aversion",
author = "Jensen, {Christian Skov} and David Lando and Pedersen, {Lasse Heje}",
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Jensen, CS, Lando, D & Pedersen, LH 2017 'Generalized Recovery' SSRN: Social Science Research Network, www.

Generalized Recovery. / Jensen, Christian Skov ; Lando, David; Pedersen, Lasse Heje.

www : SSRN: Social Science Research Network, 2017.

Publikation: Working paperForskning

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AU - Pedersen,Lasse Heje

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KW - Asset pricing theory

KW - Financial economics

KW - Pricing kernel

KW - Risk aversion

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KW - Financial economics

KW - Pricing kernel

KW - Risk aversion

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Jensen CS, Lando D, Pedersen LH. Generalized Recovery. www: SSRN: Social Science Research Network. 2017.