Generalized Recovery

Christian Skov Jensen, David Lando, Lasse Heje Pedersen

Research output: Contribution to conferencePaperResearchpeer-review

Abstract

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 date2017
Number of pages58
Publication statusPublished - 2017
EventThe 77th Annual Meeting of American Finance Association. AFA 2017 - Sheraton Grand Chicago, Chicago, United States
Duration: 6 Jan 20178 Jan 2017
Conference number: 77
http://www.afajof.org/details/page/8672741/Paper-Submission-2017.html

Conference

ConferenceThe 77th Annual Meeting of American Finance Association. AFA 2017
Number77
LocationSheraton Grand Chicago
CountryUnited States
CityChicago
Period06/01/201708/01/2017
Internet address

Cite this

Jensen, C. S., Lando, D., & Pedersen, L. H. (2017). Generalized Recovery. Paper presented at The 77th Annual Meeting of American Finance Association. AFA 2017, Chicago, United States.
Jensen, Christian Skov ; Lando, David ; Pedersen, Lasse Heje. / Generalized Recovery. Paper presented at The 77th Annual Meeting of American Finance Association. AFA 2017, Chicago, United States.58 p.
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Jensen, CS, Lando, D & Pedersen, LH 2017, 'Generalized Recovery' Paper presented at, Chicago, United States, 06/01/2017 - 08/01/2017, .

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

2017. Paper presented at The 77th Annual Meeting of American Finance Association. AFA 2017, Chicago, United States.

Research output: Contribution to conferencePaperResearchpeer-review

TY - CONF

T1 - Generalized Recovery

AU - Jensen, Christian Skov

AU - Lando, David

AU - Pedersen, Lasse Heje

PY - 2017

Y1 - 2017

N2 - 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 relationbetween 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.

AB - 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 relationbetween 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.

M3 - Paper

ER -

Jensen CS, Lando D, Pedersen LH. Generalized Recovery. 2017. Paper presented at The 77th Annual Meeting of American Finance Association. AFA 2017, Chicago, United States.