An Empirical Analysis of the Ross Recovery Theorem

39 Pages Posted: 6 May 2014 Last revised: 1 Mar 2015

See all articles by Francesco Audrino

Francesco Audrino

University of St. Gallen

Robert Huitema

University of Zurich - Department of Banking and Finance

Markus Ludwig

University of Zurich - Department of Banking and Finance

Date Written: February 28, 2015

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 for the recovery theorem of Ross (2013). 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 significantly outperform those based on their risk-neutral counterparts.

Keywords: risk-neutral density, pricing kernel, risk aversion, predictive information

JEL Classification: C14, C58, G13

Suggested Citation

Audrino, Francesco and Huitema, Robert and Ludwig, Markus, An Empirical Analysis of the Ross Recovery Theorem (February 28, 2015). Available at SSRN: https://ssrn.com/abstract=2433170 or http://dx.doi.org/10.2139/ssrn.2433170

Francesco Audrino

University of St. Gallen ( email )

Bodanstrasse 6
St. Gallen, CH-9000
Switzerland

Robert Huitema

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Markus Ludwig (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

HOME PAGE: http://vimeo.com/markusludwig

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