02216cam a22002897 4500001000700000003000500007005001700012008004100029100002600070245011000096260006600206490004200272500001500314520093900329530006101268538007201329538003601401690008201437690005601519690011201575700002001687700002501707710004201732830007701774856003801851856003701889w20209NBER20190716102636.0190716s2014 mau||||fs|||| 000 0 eng d1 aBorovička, Jaroslav.10aMisspecified Recoveryh[electronic resource] /cJaroslav Borovička, Lars P. Hansen, José A. Scheinkman. aCambridge, Mass.bNational Bureau of Economic Researchc2014.1 aNBER working paper seriesvno. w20209 aJune 2014.3 aAsset prices contain information about the probability distribution of future states and the stochastic discounting of these states. Without additional assumptions, probabilities and stochastic discounting cannot be separately identified. Ross (2013) introduced a set of assumptions that restrict the dynamics of the stochastic discount factor in a way that allows for the recovery of the underlying probabilities. We use decomposition results for stochastic discount factors from Hansen and Scheinkman (2009) to explain when this procedure leads to misspecified recovery. We also argue that the empirical evidence on asset prices indicates that the recovered measure would differ substantially from the actual probability distribution and that interpreting this measure as the true probability distribution may severely bias our inference about risk premia, investors' aversion to risk, and the welfare cost of economic fluctuations. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aD84 - Expectations • Speculations2Journal of Economic Literature class. 7aG0 - General2Journal of Economic Literature class. 7aG12 - Asset Pricing • Trading Volume • Bond Interest Rates2Journal of Economic Literature class.1 aHansen, Lars P.1 aScheinkman, José A.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w20209.4 uhttp://www.nber.org/papers/w2020941uhttp://dx.doi.org/10.3386/w20209