Math Finance Seminar

Dr. Peter Carr

Global Head of Market
Modeling Managing Director
Morgan Stanley

Title: Risk, Return and Ross Recovery

Abstract: Recently, Stephen Ross has shown that the real-world transition probabilities of a finite state Markov chain can be recovered from Arrow Debreu security prices by assuming that the pricing kernel enjoys transition independence. We motivate this restriction by deriving it as a consequence of restricting the form and dynamics of the numeraire portfolio. Working with a diffusion process for a short interest rate, we indicate how one can recover real world transition probabilities on both bounded and unbounded domains.

Light refreshments will be served.