Generalized Recovery

Christian Skov Jensen, David Lando, Lasse Heje Pedersen

Research output: Contribution to conferencePaperResearchpeer-review


We characterize when physical probabilities, marginal utilities, and the discount rate can be recovered from observed state prices for several future time periods. Our characterization makes no assumptions of the probability distribution, 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 on 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, crash risk, and other recovered statistics.
Original languageEnglish
Publication date2016
Number of pages41
Publication statusPublished - 2016
Event2016 Annual Meeting of the Society for Economic Dynamics - Toulouse, France
Duration: 30 Jun 20162 Jul 2016


Conference2016 Annual Meeting of the Society for Economic Dynamics
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