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On the Valuation of Long-Dated Assets

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  • Ian Martin

Abstract

I show that the pricing of a broad class of long-dated assets is driven by the possibility of extraordinarily bad news. This result does not depend on any assumptions about the existence of disasters, nor does it apply only to assets that hedge bad outcomes; indeed, it applies even to long-dated claims on the market in a lognormal world if the market’s Sharpe ratio is higher than its volatility, as appears to be the case in practice.

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File URL: http://www.jstor.org/stable/pdfplus/10.1086/666527
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File URL: http://www.jstor.org/stable/full/10.1086/666527
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Bibliographic Info

Article provided by University of Chicago Press in its journal Journal of Political Economy.

Volume (Year): 120 (2012)
Issue (Month): 2 ()
Pages: 346 - 358

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Handle: RePEc:ucp:jpolec:doi:10.1086/666527

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Cited by:
  1. Beeler, Jason & Campbell, John Y., 2012. "The Long-Run Risks Model and Aggregate Asset Prices: An Empirical Assessment," Critical Finance Review, now publishers, vol. 1(1), pages 141-182, January.
  2. Dutt, Tanuj & Humphery-Jenner, Mark, 2013. "Stock return volatility, operating performance and stock returns: International evidence on drivers of the ‘low volatility’ anomaly," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 999-1017.
  3. Gollier, Christian, 2012. "Asset pricing with uncertain betas: A long-term perspective," IDEI Working Papers 752, Institut d'Économie Industrielle (IDEI), Toulouse.
  4. Ian Martin, 2013. "The Lucas Orchard," Econometrica, Econometric Society, vol. 81(1), pages 55-111, 01.
  5. Koijen, Ralph & Lustig, Hanno & van Nieuwerburgh, Stijn, 2012. "The Cross-Section and Time-Series of Stock and Bond Returns," CEPR Discussion Papers 9024, C.E.P.R. Discussion Papers.
  6. Martin L. Weitzman, 2012. "Rare Disasters, Tail-Hedged Investments, and Risk-Adjusted Discount Rates," NBER Working Papers 18496, National Bureau of Economic Research, Inc.
  7. Gollier, Christian, 2013. "A theory of rational short-termism with uncertain betas," IDEI Working Papers 771, Institut d'Économie Industrielle (IDEI), Toulouse.

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