An Empirical Implementation of the Ross Recovery Theorem as a Prediction Device

Item Type Journal paper
Abstract

Building on the method of Ludwig (2015) to construct robust state price density surfaces from snapshots of option prices, we develop a nonparametric estimation strategy based on the recovery theorem of Ross (2015). Using options on the S&P 500, we then investigate whether or not recovery yields predictive information beyond what can be gleaned from risk-neutral densities. Over the 13 year period from 2000 to 2012, we find that market timing strategies based on recovered moments outperform those based on risk-neutral moments.

Authors Audrino, Francesco; Huitema, Robert & Ludwig, Markus
Journal or Publication Title Journal of Financial Econometrics
Language English
Keywords Risk-neutral density; Pricing kernel; Ross recovery theorem; Predictive information.
Subjects finance
HSG Classification contribution to scientific community
HSG Profile Area SEPS - Quantitative Economic Methods
Refereed Yes
Date 4 August 2021
Publisher Oxford University Press
Volume 19
Number 2
Page Range 291-312
ISSN 1479-8409
Contact Email Address francesco.audrino@unisg.ch
Depositing User Prof. Ph.D Francesco Audrino
Date Deposited 25 Jan 2019 10:38
Last Modified 04 Aug 2021 07:42
URI: https://www.alexandria.unisg.ch/publications/256491

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Citation

Audrino, Francesco; Huitema, Robert & Ludwig, Markus (2021) An Empirical Implementation of the Ross Recovery Theorem as a Prediction Device. Journal of Financial Econometrics, 19 (2). 291-312. ISSN 1479-8409

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https://www.alexandria.unisg.ch/id/eprint/256491
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