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Very simply, Ross' framework assumes a great deal to extract the true pricing kernel. Time homogeneity, additively separable state dependent utility, (discrete time Markovian structure - though these have been relaxed.) In particular, there are two schools of criticism, one is that time homogeneity makes little sense in the real market. In fact, the Recovery ...


Let me provide an intuitive answer that I just thought of (correct me if I am wrong). So starting with two Stochastic Differential Equations (SDE) $ \frac{dS_t}{S_t}=μdt+σdW_t$ $ \frac{dD_t}{D_t}=-rdt$ (I am assuming our risk-free rate to be constant as is done in most introductory financial math courses) Notice: $D_t = e^{-rt}$ is the solution to the ODE ...

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