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Recovery theorem: expounded and applied
Includes bibliographical references.
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| Main Author: | |
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| Other Authors: | |
| Format: | Thesis |
| Language: | English |
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Division of Actuarial Science
2014
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| _version_ | 1867613151150735360 |
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| access_status_str | Open Access |
| author | Backwell, Alex |
| author2 | Taylor, David |
| author_browse | Backwell, Alex Taylor, David |
| author_facet | Taylor, David Backwell, Alex |
| author_sort | Backwell, Alex |
| collection | Thesis |
| description | Includes bibliographical references. |
| format | Thesis |
| id | oai:open.uct.ac.za:11427/8531 |
| institution | University of Cape Town (South Africa) |
| language | eng |
| last_indexed | 2026-06-10T12:31:34.243Z |
| license_str | Not specified — see source repository |
| provenance_str_mv | Harvested via OAI-PMH from UCTD — University of Cape Town Open Access Repository |
| publishDate | 2014 |
| publishDateRange | 2014 |
| publishDateSort | 2014 |
| publisher | Division of Actuarial Science |
| publisherStr | Division of Actuarial Science |
| record_format | dspace |
| source_str | UCTD — University of Cape Town Open Access Repository |
| spelling | oai:open.uct.ac.za:11427/8531 Recovery theorem: expounded and applied Backwell, Alex Taylor, David Mathematical Finance Includes bibliographical references. This dissertation is concerned with Ross' (2011) Recovery Theorem. It is generally held that a forward-looking probability distribution is unobtainable from derivative prices, because the market's risk-preferences are conceptually inextricable from the implied real-world distribution. Ross' result recovers this distribution without making the strong preference assumptions assumed necessary under the conventional paradigm. This dissertation aims to give the reader a thorough understanding of Ross Recovery, both from a theoretical and practical point of view. This starts with a formal delineation of the model and proof of the central result, motivated by the informal nature of Ross' working paper. This dissertation relaxes one of Ross' assumptions and arrives at the equivalent conclusion. This is followed by a critique of the model and assumptions. An a priori discussion only goes so far, but potentially problematic assumptions are identified, chief amongst which being time additive preferences of a representative agent. Attention is then turned to practical application of the theorem. The author identifies a number of obstacles to applying the result { some of which are somewhat atypical and have not been directly addressed in the literature { and suggests potential solutions. A salient obstacle is calibrating a state price matrix. This leads to an implementation of Ross Recovery on the FTSE/JSE Top40. The suggested approach is found to be workable, though certainly not the final word on the matter. A testing framework for the model is discussed and the dissertation is concluded with a consideration of the findings and the theorem's applicability. 2014-10-17T10:09:58Z 2014-10-17T10:09:58Z 2014 Master Thesis Masters MPhil http://hdl.handle.net/11427/8531 eng application/pdf Division of Actuarial Science Faculty of Commerce University of Cape Town |
| spellingShingle | Mathematical Finance Backwell, Alex Recovery theorem: expounded and applied |
| thesis_degree_str | Master's |
| title | Recovery theorem: expounded and applied |
| title_full | Recovery theorem: expounded and applied |
| title_fullStr | Recovery theorem: expounded and applied |
| title_full_unstemmed | Recovery theorem: expounded and applied |
| title_short | Recovery theorem: expounded and applied |
| title_sort | recovery theorem expounded and applied |
| topic | Mathematical Finance |
| url | http://hdl.handle.net/11427/8531 |
| work_keys_str_mv | AT backwellalex recoverytheoremexpoundedandapplied |