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 stedLondon
UdgiverCentre for Economic Policy Research
Antal sider66
StatusUdgivet - 2018
NavnCentre for Economic Policy Research. Discussion Papers
NummerDP12665
ISSN0265-8003

Emneord

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

Citer dette

Lando, D., Pedersen, L. H., & Jensen, C. S. (2018). Generalized Recovery. London: Centre for Economic Policy Research. Centre for Economic Policy Research. Discussion Papers, Nr. DP12665
Lando, David ; Pedersen, Lasse Heje ; Jensen, Christian Skov . / Generalized Recovery. London : Centre for Economic Policy Research, 2018. (Centre for Economic Policy Research. Discussion Papers; Nr. DP12665).
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Lando, D, Pedersen, LH & Jensen, CS 2018 'Generalized Recovery' Centre for Economic Policy Research, London.

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

London : Centre for Economic Policy Research, 2018.

Publikation: Working paperForskning

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AB - 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.

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KW - Pricing kernel

KW - Risk aversion

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KW - Financial economics

KW - Pricing kernel

KW - Risk aversion

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Lando D, Pedersen LH, Jensen CS. Generalized Recovery. London: Centre for Economic Policy Research. 2018.