Generalized recovery

Christian Skov Jensen, David Lando and Lasse Pedersen

Journal of Financial Economics, 2019, vol. 133, issue 1, 154-174

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 allows a closed-form linearized solution. We implement our model empirically, testing the predictive power of the recovered expected return and other recovered statistics.

Keywords: Recovery; Asset pricing; Pricing kernel; Predicting returns (search for similar items in EconPapers)
JEL-codes: G1 G12 G13 G17 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Generalized Recovery (2018)
Working Paper: Generalized Recovery (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:133:y:2019:i:1:p:154-174

DOI: 10.1016/j.jfineco.2018.12.003

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