Generalized Recovery

Lasse Pedersen, Christian Skov Jensen and David Lando

No 12665, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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.

Keywords: Asset pricing theory; Financial economics; Pricing kernel; Risk aversion (search for similar items in EconPapers)
JEL-codes: G00 G1 G12 G13 G17 (search for similar items in EconPapers)
Date: 2018-01
New Economics Papers: this item is included in nep-ore
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Generalized recovery (2019)
Working Paper: Generalized Recovery (2016)
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