Can We Recover?
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Mon, 29/04 12:30 |
Peter Carr (NYU and Morgan Stanley) |
Nomura Seminar  |
Oxford-Man Institute |
| The Ross Recovery Theorem gives sufficient conditions under which the market’s beliefs can be recovered from risk-neutral probabilities. His approach places mild restrictions on the form of the preferences of the representative investor. We present an alternative approach which has no restrictions beyond preferring more to less, Instead, we restrict the form and risk-neutral dynamics of John Long’s numeraire portfolio. We also replace Ross’ finite state Markov chain with a diffusion with bounded state space. Finally, we present some preliminary results for diffusions on unbounded state space. In particular, our version of Ross recovery allows market beliefs to be recovered from risk neutral probabilities in the classical Cox Ingersoll Ross model for the short interest rate. | |||