The Recovery Theorem

Stephen Ross

No 17323, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We can only estimate the distribution of stock returns but we observe the distribution of risk neutral state prices. Risk neutral state prices are the product of risk aversion - the pricing kernel - and the natural probability distribution. The Recovery Theorem enables us to separate these and to determine the market's forecast of returns and the market's risk aversion from state prices alone. Among other things, this allows us to determine the pricing kernel, the market risk premium, the probability of a catastrophe, and to construct model free tests of the efficient market hypothesis.

JEL-codes: E1 G0 G11 G12 G17 (search for similar items in EconPapers)
Date: 2011-08
New Economics Papers: this item is included in nep-bec, nep-mac and nep-upt
Note: AP ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Published as STEVE ROSS, 2015. "The Recovery Theorem," The Journal of Finance, vol 70(2), pages 615-648.

Downloads: (external link)
http://www.nber.org/papers/w17323.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:17323

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w17323

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().