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)
June 16, 2013
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. Formally, we apply a generalized version of Perron-Frobenius theory to construct this probability measure. We discuss methods for recovering this distribution from financial market data; we apply this distribution to characterize the impact of model misspecification; and we apply it to study Kreps-Porteus style utility recursions for infinite horizon economies.
Number of Pages in PDF File: 26
JEL Classification: G12working papers series
Date posted: April 24, 2013 ; Last revised: June 16, 2013
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo8 in 0.297 seconds