Recovery and Consistency


Recovery, the process of uniquely determining market’s belief, time and risk preferences from asset prices, requires a subjective state-space specification of the underlying economy that is not observed before the recovery is implemented. Different subjective specifications lead to different recovery results that, albeit unique under the respective specifications, are almost surely inconsistent with each other. This consistency issue prevails universally in the original, extended, and approximate versions of the recovery, given perfect (error-free and infinite) price data and when all required recovery assumptions are upheld. Consistency requirement highlights a new and general challenge for the recovery paradigm.

Review of Financial Studies, revise & resubmit