Recovery theorem: expounded and applied

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dc.contributor.advisorTaylor, Daviden_ZA
dc.contributor.authorBackwell, Alexen_ZA
dc.date.accessioned2014-10-17T10:09:58Z
dc.date.available2014-10-17T10:09:58Z
dc.date.issued2014en_ZA
dc.descriptionIncludes bibliographical references.en_ZA
dc.description.abstractThis 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.en_ZA
dc.identifier.apacitationBackwell, A. (2014). <i>Recovery theorem: expounded and applied</i>. (Thesis). University of Cape Town ,Faculty of Commerce ,Division of Actuarial Science. Retrieved from http://hdl.handle.net/11427/8531en_ZA
dc.identifier.chicagocitationBackwell, Alex. <i>"Recovery theorem: expounded and applied."</i> Thesis., University of Cape Town ,Faculty of Commerce ,Division of Actuarial Science, 2014. http://hdl.handle.net/11427/8531en_ZA
dc.identifier.citationBackwell, A. 2014. Recovery theorem: expounded and applied. University of Cape Town.en_ZA
dc.identifier.ris TY - Thesis / Dissertation AU - Backwell, Alex AB - 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. DA - 2014 DB - OpenUCT DP - University of Cape Town LK - https://open.uct.ac.za PB - University of Cape Town PY - 2014 T1 - Recovery theorem: expounded and applied TI - Recovery theorem: expounded and applied UR - http://hdl.handle.net/11427/8531 ER - en_ZA
dc.identifier.urihttp://hdl.handle.net/11427/8531
dc.identifier.vancouvercitationBackwell A. Recovery theorem: expounded and applied. [Thesis]. University of Cape Town ,Faculty of Commerce ,Division of Actuarial Science, 2014 [cited yyyy month dd]. Available from: http://hdl.handle.net/11427/8531en_ZA
dc.language.isoengen_ZA
dc.publisher.departmentDivision of Actuarial Scienceen_ZA
dc.publisher.facultyFaculty of Commerceen_ZA
dc.publisher.institutionUniversity of Cape Town
dc.subject.otherMathematical Financeen_ZA
dc.titleRecovery theorem: expounded and applieden_ZA
dc.typeMaster Thesis
dc.type.qualificationlevelMasters
dc.type.qualificationnameMPhilen_ZA
uct.type.filetypeText
uct.type.filetypeImage
uct.type.publicationResearchen_ZA
uct.type.resourceThesisen_ZA
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