### Abstract

Original language | English |
---|---|

Place of Publication | London |

Publisher | Centre for Economic Policy Research |

Number of pages | 66 |

Publication status | Published - 2018 |

Series | Centre for Economic Policy Research. Discussion Papers |
---|---|

Number | DP12665 |

ISSN | 0265-8003 |

### Keywords

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

### Cite this

*Generalized Recovery*. London: Centre for Economic Policy Research. Centre for Economic Policy Research. Discussion Papers, No. DP12665

}

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

Research output: Working paper › Research

TY - UNPB

T1 - Generalized Recovery

AU - Lando, David

AU - Pedersen, Lasse Heje

AU - Jensen, Christian Skov

PY - 2018

Y1 - 2018

N2 - 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.

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.

KW - Asset pricing theory

KW - Financial economics

KW - Pricing kernel

KW - Risk aversion

KW - Asset pricing theory

KW - Financial economics

KW - Pricing kernel

KW - Risk aversion

UR - http://esc-web.lib.cbs.dk/login?url=http://www.cepr.org

M3 - Working paper

BT - Generalized Recovery

PB - Centre for Economic Policy Research

CY - London

ER -