Finance Seminar: Peter Carr, Morgan Stanley

It is well known that option prices can be used to infer so called risk-neutral probabilities.  These risk neutral probabilities differ from investor beliefs due to distortions caused by risk aversion.  Recently, Professor Steve Ross proposed a  set of sufficient conditions under which one can separately identify beliefs and market risk aversion. In this talk, I will review Ross' recovery theorem and the surrounding theoretical and empirical work.

Papers which I plan to survey:

• http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2199487
• http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2433170
• http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2439002
• http://www.fooledbyrandomness.com/recoverytheorem.pdf
• http://faculty.baruch.cuny.edu/lwu/890/CarrYu2012.pdf
• http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2441376
• http://faculty.haas.berkeley.edu/walden/HaasWebpage/recovery2013.pdf

Finance Seminars at Caltech are funded through the generous support of the Linde Institute and Stephen A. Ross.