Anmerkungen:
In: Journal of Economic Dynamics and Control, Volume 108, November 2019, 103750
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments September 13, 2019 erstellt
Beschreibung:
Recently, Ross (2015) showed that the real-world probability distribution of a discrete Markovian state variable can be recovered from observed option prices. The so-called recovery theorem follows from Perron-Frobenius matrix theory when the pricing kernel is transition independent. In this paper, we generalize the recovery theorem to continuous state spaces using Perron-Frobenius operator theory. Building on our theoretical results, we devise a nonparametric estimation approach to empirically recover the pricing kernel and real-world probability density in closed form. Using S&P 500 index options, we analyze recovered pricing kernels empirically and find evidence that Ross recovery is misspecified