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Exhaustibility and Risk as Asset Class Dimensions: A Social Investor Approach to Capital-Resource Economies

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  • Johnson Kakeu

    (Morehouse College)

Abstract

This paper develops a framework in which asset class dimensions are extended to include both risk and exhaustibility for explaining the evolution of shadow prices of marginal units of exhaustible natural resources in capital-resource economies. It is shown that the pricing kernel function required for socially valuing marginal units of exhaustible resource, hereafter called the Exhaustion-Stochastic Discount Factor, combines a factor that discounts for risk and another factor that discounts for resource exhaustion over time. The social rate of return on the marginal unit of resource stock adds to the risk-premium an exhaustion premium that accounts for the resource depletion over time. In this setting, the principle of no-arbitrage holds by extending asset-class dimensions to include not only a risk dimension but also an exhaustibility dimension.

Suggested Citation

  • Johnson Kakeu, 2016. "Exhaustibility and Risk as Asset Class Dimensions: A Social Investor Approach to Capital-Resource Economies," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 65(4), pages 677-695, December.
    • Handle: RePEc:kap:enreec:v:65:y:2016:i:4:d:10.1007_s10640-015-9917-x
    DOI: 10.1007/s10640-015-9917-x
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    More about this item

    Keywords

    Capital-resource economies; Recursive utility; Shadow price; Marginal analysis; Exhaustibility and risk dimensions; Asset classes; Social discount rate; Exhaustion premium and risk premium; Sustainability;
    All these keywords.

    JEL classification:

    • Q30 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - General
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • D6 - Microeconomics - - Welfare Economics
    • G1 - Financial Economics - - General Financial Markets

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