Empirical Ross Recovery of International Market Expectations
Marie-Helene Gagnon  1, *@  , Gabriel John Power  1@  , Dominique Toupin  1@  
1 : Université Laval
* : Auteur correspondant

This paper applies Ross's (2015) Recovery Theorem to international stock index options data to obtain the market's true expectations as well as the implied risk preferences. First, we document a reliable methodology to enable an empirical implementation of Ross's results. Then, we assess whether the quantities recovered are the true market expectations. Second, we show that the volatility of the recovered distribution is a significant and unbiased predictor of future realized volatility and that it improves the performance of volatility forecasts made using risk-neutral volatility (e.g. VIX). Third, we find evidence that recovered volatility and risk preferences can better explain index returns compared to the risk-neutral distribution. Our paper thus confirms the empirical validity, relevance and usefulness of the Recovery Theorem as way to obtain the true expectations and risk preferences of the market.

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