Work

The Recovery Theorem

Year: 2011

Type: article

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

Source: The Journal of Finance

DOI: 10.1111/jofi.12092

Author: STEVE ROSS

Institutions: University of California, Los Angeles, Yale University, Massachusetts Institute of Technology

Language: English

Topic: Stochastic processes and financial applications

Subfield: Finance

Field: Economics, Econometrics and Finance

Domain: Social Sciences

Open Access status: green

OpenAlex ID: W2122413893

FWCI: 16.73

Cites: 45

Cited by: 348

Related to: 9