Generalized Recovery

Christian Skov Jensen, David Lando, Lasse Heje Pedersen

Research output: Working paperResearch

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.
Original languageEnglish
Place of Publicationwww
PublisherSSRN: Social Science Research Network
Number of pages63
Publication statusPublished - 2017

Keywords

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

Cite this

Jensen, C. S., Lando, D., & Pedersen, L. H. (2017). Generalized Recovery. www: SSRN: Social Science Research Network.