Can Investor Beliefs be Extracted from Option Prices?
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:
Finance Seminars at Caltech are funded through the generous support of the Linde Institute and Stephen A. Ross.