An Empirical Implementation of the Ross Recovery Theorem as a Prediction Device*

Nonparametric Option Pricing under Shape Restrictions

Francesco Audrino, Robert Huitema and Markus Ludwig

Journal of Financial Econometrics, 2021, vol. 19, issue 2, 291-312

Abstract: Building on the method of Ludwig (2015) to construct robust state price density surfaces from snapshots of option prices, we develop a nonparametric estimation strategy based on the recovery theorem of Ross (2015). Using options on the S&P 500, we then investigate whether or not recovery yields predictive information beyond what can be gleaned from risk-neutral densities. Over the 13 year period from 2000 to 2012, we find that market timing strategies based on recovered moments outperform those based on risk-neutral moments.

Keywords: predictive information; pricing kernel; risk-neutral density; Ross recovery theorem (search for similar items in EconPapers)
JEL-codes: C14 C58 G13 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (3)

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