State Prices and Implementation of the Recovery Theorem

Journal of Risk and Financial Management

Alex Backwell¹ 

[1] Department of Actuarial Science and the African Collaboration for Quantitative Finance and Risk Research, University of Cape Town, Rondebosch, Cape Town 7700, South Africa; E-Mail

关键词: Recovery Theorem;    Ross recovery;    real-world measure;    predictive information;    state prices;    state-price matrix;   

DOI  :  10.3390/jrfm8010002

来源: mdpi

【 摘 要 】

It is generally held that derivative prices do not contain useful predictive information, that is, information relating to the distribution of future financial variables under the real-world measure. This is because the market’s implicit forecast of the future becomes entangled with market risk preferences during derivative price formation. A result derived by Ross [1], however, recovers the real-world distribution of an equity index, requiring only current prices and mild restrictions on risk preferences. In addition to being of great interest to the theorist, the potential practical value of the result is considerable. This paper addresses implementation of the Ross Recovery Theorem. The theorem is formalised, extended, proved and discussed. Obstacles to application are identified and a workable implementation methodology is developed.

【 授权许可】

CC BY   
© 2015 by the author; licensee MDPI, Basel, Switzerland.