Journal of Financial Economics Vol. 133 No. 1 2019

Generalized recovery

Christian Skov Jensen¹; David Lando^2,3; Lasse Heje Pedersen^2,4,5,3

¹ Bocconi University · ² Copenhagen Business School · ³ Centre for Economic Policy Research · ⁴ New York University · ⁵ Capital University

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.

DOI

10.1016/j.jfineco.2018.12.003

Volume

133

Issue

1

Pages

154-174

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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