Abstract

http://ssrn.com/abstract=2256246
 
 

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Stochastic Compounding and Uncertain Valuation


Lars Peter Hansen


University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Jose A. Scheinkman


Columbia University; Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

January 9, 2014


Abstract:     
Exploring long-term implications of valuation leads us to recover and use a distorted probability measure that reflects the long-term implications for risk pricing. This measure is typically distinct from the physical and the risk neutral measures that are well known in mathematical finance. We apply a generalized version of Perron-Frobenius theory to construct this probability measure and present several applications. We employ Perron-Frobenius methods to i) explore the observational implications of risk adjustments and investor beliefs as reflected in asset market data; ii) catalog alternative forms of misspecification of parametric valuation models; and iii) characterize how long-term components of growth-rate risk impact investor preferences implied by Kreps-Porteus style utility recursions.

Number of Pages in PDF File: 29

JEL Classification: G12

working papers series


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Date posted: April 24, 2013 ; Last revised: February 5, 2014

Suggested Citation

Hansen, Lars Peter and Scheinkman, Jose A., Stochastic Compounding and Uncertain Valuation (January 9, 2014). Available at SSRN: http://ssrn.com/abstract=2256246 or http://dx.doi.org/10.2139/ssrn.2256246

Contact Information

Lars Peter Hansen
University of Chicago - Department of Economics ( email )
1101 E 58th ST
Chicago, IL 60637
United States
773-702-8170 (Phone)
773-702-8490 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Jose A. Scheinkman (Contact Author)
Columbia University ( email )
420 W. 118th Street
New York, NY 10027
United States
HOME PAGE: http://www.princeton.edu/~joses
Princeton University - Department of Economics ( email )
26 Prospect Avenue
Princeton, NJ 08544
United States
609-258-4020 (Phone)
609-258-6419 (Fax)
HOME PAGE: http://www.princeton.edu/~joses

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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