The Recovery Theorem and Long-Term Factorization of the Pricing Kernel

You are cordially invited to the FRE Lecture Series. Our special invited guest speaker is Likuan Qin, PhD candidate from Northwestern University.

Ross (2015) proposed the Recovery Theorem which uses option prices to predict underlying asset returns. We first extend it to general Markovian models and link it with the long-term factorization of the Markovian pricing kernel due to Hansen and Scheinkman (2009). We next extend the long-term factorization of the pricing kernel to semimartingale economies and reveals the economic implication of the Recovery Theorem. With these theoretical insights, we design a statistical test for the Recovery Theorem in US Treasury market. Our test rejected the Recovery Theorem at a very high confidence level.

Bio: 

Likuan Qin is a PhD candidate of Industrial Engineering and Management Sciences at Northwestern University. He obtained a B.S. degree in mathematics from Peking University in 2012. His research interests are in financial engineering, stochastic modeling, empirical finance and machine learning. He won the 2nd Place of the 2016 INFORMS Finance Section Best Student Paper Competition.

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